Board of Governors of the Federal Reserve System

Thank you, Chair Powell. I would like to begin by thanking our staff and the staff of the other federal banking agencies—the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation—for their work on the proposal that we are considering today.

This proposal is designed to address a long-identified problem with the calibration of the supplementary leverage ratio requirement. Since the enhanced supplementary leverage ratio (eSLR) was adopted in 2014, this requirement has often become a binding constraint rather than a backstop to risk-based capital requirements, as was originally intended. When leverage requirements become binding, banks are incentivized to reduce engagement in lower-risk, lower-return activities including intermediating the U.S. Treasury market.

For U.S. GSIBs, the proposal replaces the 2 percent eSLR buffer with half of the GSIB's method 1 surcharge to restore the leverage requirement. This approach would significantly reduce the likelihood of the eSLR becoming binding under stress conditions for the largest banks and would more closely align it with the Basel leverage ratio standard. This change will 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.

For GSIB bank subsidiaries, the proposal also replaces the 3 percent eSLR buffer with half of the GSIB's method 1 surcharge. This change would enable the largest banks to allocate capital more efficiently within their organizations—including to their affiliated broker-dealers, which play a critical role in U.S. capital markets and in Treasury market intermediation.

These changes at the bank level do not enable them to increase capital distributions to shareholders, as their holding companies would generally remain constrained by risk-based capital requirements. In fact, the GSIB holding companies are required to contribute assets to their bank subsidiaries to cover capital shortfalls, if needed, pursuant to secured support agreements and are subject to general source of strength obligations.

The proposal will help to build resilience in U.S. Treasury markets, reducing the likelihood of market dysfunction and the need for the Federal Reserve to intervene in a future stress event. We should be proactive in addressing the unintended consequences of bank regulation, including the bindingness of the eSLR, while ensuring the framework continues to promote safety, soundness, and financial stability.

Finally, today's proposal is an important first step in balancing the stability of the financial system and Treasury market resilience, while preserving safety and soundness and restoring the eSLR as a backstop. The proposal also seeks comment on a number of alternatives, including modifications to the calculation of the SLR's denominator.

The alternatives include combining the buffer changes with excluding from the denominator U.S. Treasuries held for trading at broker-dealers or excluding all U.S. Treasuries and reserves from the SLR denominator. I welcome feedback on the proposal, especially on the consideration of any additional alternatives, tradeoffs, and any second order effects.

Thank you again to the staff who prepared this sensible and timely proposal. You have done excellent work, and I look forward to receiving public feedback on the details as we move forward with the work of revisiting the capital framework.

I will now turn to our staff to review the details of the proposal and answer any questions from Board Members.