Federal Reserve's Proposal to Ease Capital Rules Sparks Internal Division and Industry Debate

In the heart of New York City's financial district, the New York Stock Exchange stands as a testament to the ever-evolving landscape of American capitalism. On a brisk November day in 2020, it was a symbol of resilience amidst uncertainty. Fast forward to June 25, 2025, and the Federal Reserve has set the stage for a potentially transformative shift in banking regulations, proposing to ease a critical capital rule that has long been a bone of contention among Wall Street's elite.

The rule in question, the enhanced supplementary leverage ratio (eSLR), was born from the ashes of the financial crisis, designed as a bulwark to ensure the stability of the nation's financial behemoths. It dictates the amount and quality of capital that banks must maintain on their balance sheets, a measure that has been both a safeguard and a straitjacket. As bank reserves have swelled and concerns over Treasury market liquidity have intensified, the call for reform has grown louder, echoing through the corridors of power and finance.

At 2 p.m. ET on June 25, 2025, the Federal Reserve Board is set to consider and vote on this contentious proposal. Fed Chair Jerome Powell, in a carefully crafted statement, underscored the rationale behind reconsidering the original approach. "This stark increase in the amount of relatively safe and low-risk assets on bank balance sheets over the past decade or so has resulted in the leverage ratio becoming more binding," Powell articulated, hinting at a paradigm shift in regulatory philosophy.

The draft proposal, in its current form, would reform the eSLR so that the amount of capital banks must set aside is directly tied to how large a role each firm plays in the global financial system. Instead of a one-size-fits-all add-on, the enhanced supplementary leverage ratio standard would range from 3.5 percent to 4.25 percent, depending on the institution. For U.S. global systemically important banks (GSIBs), the proposal replaces the previous 2 percent eSLR buffer with half of the GSIB’s method 1 surcharge, aligning the requirement more closely with the Basel leverage ratio standard. This change is designed to reduce the likelihood of the eSLR becoming binding under stress conditions for the largest banks and to enable these institutions to promote Treasury market functioning and engage in other low-risk activities during periods of financial stress. Importantly, this change would not lead to a material reduction of the Tier 1 capital requirements of the largest banks.

Support for the proposal is not unanimous within the Fed's ranks. Vice Chair for Supervision Michelle W. Bowman and Governor Christopher Waller have voiced their endorsement, emphasizing the potential for bolstering resilience in U.S. Treasury markets. "This proposal is designed to address a long-identified problem with the calibration of the supplementary leverage ratio requirement," Bowman asserted, highlighting the proactive nature of the regulatory recalibration.

Yet, dissent simmers beneath the surface. Governors Adriana Kugler and Michael Barr, the latter now serving as a Governor rather than Vice Chair for Supervision, have expressed their reservations. Barr, in a candid statement, cautioned against the potential pitfalls of the proposal, warning that "even if some further Treasury market intermediation were to occur in normal times, this proposal is unlikely to help in times of stress. In short, firms will likely use the proposal to distribute capital to shareholders and engage in the highest return activities available to them, rather than to meaningfully increase Treasury intermediation."

The leverage ratio has faced criticism for its perceived penalization of banks holding Treasurys, a sentiment echoed in the official documents released alongside the proposal. These new regulations aim to harmonize with the Basel standards, the global benchmark for banking regulation.

As the Federal Reserve stands on the precipice of a decision that could reshape the financial landscape, the stakes are high. The proposal not only tests the balance between safeguarding financial stability and fostering market fluidity but also underscores the enduring tension between regulatory oversight and market freedom. As the clock ticks towards the decisive vote, the financial world watches with bated breath, acutely aware that the outcome could reverberate far beyond the hallowed halls of Wall Street.