U.S. bank regulators are preparing to loosen a key rule that limits how much the country’s biggest banks can trade in the $29 trillion Treasury market. The rule in question is the enhanced supplementary leverage ratio (eSLR), a measure that forces large banks to keep a certain amount of capital as a safety cushion based on their total assets — including U.S. Treasuries, which are among the safest investments in the world.
Right now, this rule requires the biggest banks, such as JPMorgan Chase, Goldman Sachs, and Morgan Stanley, to hold at least 5% capital at the parent company level, and 6% at the bank subsidiary level. But regulators — including the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) — are looking to reduce that requirement to a range between 3.5% and 4.5%.
This move is aimed at easing constraints that some say are hurting the banks’ ability to buy and sell U.S. government debt, especially during times of market stress. Big banks argue that the current rule treats Treasuries the same as much riskier assets, even though Treasuries are considered nearly risk-free. They say this discourages them from holding or trading these securities when markets are shaky — which is precisely when the government needs strong buyers the most.
Federal Reserve Chair Jerome Powell has openly expressed concern about the health of the Treasury market. Back in February, he told Congress that liquidity in the market — or how easily Treasuries can be bought and sold — has been a worry for some time.
Who Is Involved and What’s Next?
The change is being led by the Federal Reserve, which is set to meet on June 25 to discuss the plan. The FDIC and OCC are also part of the proposal, though they haven’t announced when they will hold their own meetings.
This proposal follows a similar move in 2018, when regulators under President Donald Trump adjusted the same rule to make it more flexible. The new proposal won’t remove Treasuries from the ratio altogether — as some had predicted — but it may ask the public to weigh in on whether that should be considered in the future.
Michelle Bowman, Vice Chair for Supervision at the Federal Reserve, recently commented that leverage ratios should serve as a “backstop”, not the main rule limiting how much capital banks must hold. She warned that when these ratios are set too high, they can create “market distortions”.
Treasury Secretary Scott Bessent has pointed to estimates suggesting that relaxing the rule could lower Treasury yields — the interest rates on government bonds — by several tenths of a percentage point. That might make it cheaper for the government to borrow money.
This isn’t the first time regulators have tried to ease this rule. During the COVID-19 crisis, Treasuries were temporarily excluded from the leverage ratio, but that exclusion expired and was not renewed — leaving banks once again constrained.
Critics Raise Concerns
Not everyone agrees with loosening the rules. Jeremy Kress, a former Fed attorney who now teaches at the University of Michigan, warned that past attempts to ease this rule didn’t actually lead banks to buy more Treasuries. When the leverage ratio was relaxed in 2020, most banks didn’t use the extra room to support the market. Instead, they avoided triggering limits that would have prevented them from paying dividends or buying back shares.
This has led some experts to believe that if banks get more freedom under the revised rule, they might use it to return money to shareholders rather than improve Treasury trading. That raises questions about how much benefit the market will really get from this change.
Graham Steele, another former Fed official who worked in the Biden administration, also criticized the move. He said that easing capital requirements won’t solve the deeper problems in the Treasury market and could instead make the financial system more fragile.
While the goal of the proposed change is to give banks more flexibility, especially in moments of stress, there is growing debate over whether it will actually help — or if it will simply roll back important safeguards put in place after the last financial crisis.
