The Supplementary Leverage Ratio (SLR) is a critical component of bank capital regulation, designed to ensure that banks maintain adequate capital to cover their total leverage exposure (TLE). However, the current SLR framework poses significant challenges, particularly for low-risk activities such as Treasury market intermediation. This commentary supports reforms to the SLR that would enhance its effectiveness as a backstop rather than the primary capital standard for banks and bank holding companies.
Central clearing of Treasury repo transactions can substantially reduce the total leverage exposure for the SLR and increase capacity for Treasury market intermediation. Analysis indicates that greater central clearing of Treasury repo transactions is creating significant netting benefits for dealers’ balance sheets. These benefits reduce the total leverage exposure (TLE) for the SLR, thereby expanding dealer capacity for Treasury market intermediation. Material netting benefits, up to $900 billion based on data from April 2025, are already being achieved through the central clearing of dealer-to-customer repo transactions by utilizing the sponsored repo service of the Fixed Income Clearing Corporation. Data on repo and reverse repo positions at primary dealers in April 2025 reveal additional potential netting benefits of $700 billion, which can be realized as the central clearing of Treasury repo transactions continues to expand organically and as the central clearing rule is implemented. These benefits are sizable, nearly double the primary dealers’ total net position in Treasury securities of $384 billion in April 2025.
Implications for Proposed Reforms to the SLR
These findings have important implications for proposed reforms to the SLR. Banking regulators face a tradeoff: a higher SLR could restrict intermediation capacity for Treasury markets and other low-risk activities, whereas a lower SLR could lead to higher risks in the banking system. Central clearing improves this tradeoff because it expands intermediation capacity without increasing risks for banking firms. In fact, central clearing can reduce risks through multilateral netting and more standardized risk management practices. By reducing the TLE for the SLR, central clearing of Treasury repo already helps relax the constraint associated with SLR.
Recalibration of the Enhanced Supplementary Leverage Ratio (e-SLR) Surcharge
The proposed recalibration of the enhanced Supplementary Leverage Ratio (e-SLR) surcharge for Global Systemically Important Banks (GSIBs) is supported. The current level of the surcharge—2% at the holding company and 3% at depository institution subsidiaries—increases the likelihood that the e-SLR rather than the risk-based capital requirement would be the binding capital constraint. This unintended result could lead to perverse risk-taking incentives. Moreover, with current risk-based capital requirements and current levels of capital, a moderate reduction in the e-SLR surcharge would not lead to a meaningful reduction of required capital in dollar terms at the holding company. Another option not included in the proposal would be to make the e-SLR surcharge countercyclical; that is, allow for a temporarily lower SLR in periods of market stress. This option could make the capital buffer available to absorb losses and expand capacity in periods when Treasury market intermediation is needed the most.
Exclusion of Treasury Securities from the TLE
An outright exclusion of all Treasury securities from the TLE used to calculate the SLR requirement is not supported. Because sovereign debt issued in domestic currencies has a risk weight of zero under the Basel standard (including the current capital rules in the U.S.), the outright exclusion of Treasury securities from TLE would lead to a complete absence of a capital charge for the interest rate risk of Treasury securities held in the banking book. The safety and soundness of the banking system require the recognition of interest rate risks on banking books. For this purpose, the SLR is still a critical, and the only, backstop. Indeed, the failures of two mid-sized banks in March 2023 and stresses on many others serve as a painful reminder that interest rate risks can be substantial and must not be ignored. However, an option to exclude Treasury securities held in the trading account is supported. These securities are marked-to-market and receive a market risk capital charge. This narrow exclusion could make Treasury intermediation more flexible and elastic, for example, by allowing dealers to purchase Treasury securities in the trading account during a market selloff without triggering the SLR. However, such an exclusion would not be consistent with Basel III.
Exemption of Reserves from the TLE
Further exploration of exempting reserves from the TLE is supported for two reasons. First, the aggregate amount of reserves is controlled by the central bank, not the banks. The exclusion of reserves in TLE would also avoid any unintended interference with monetary policy implementation. Second, central bank reserves are the ultimate safe asset, and their exclusion from TLE would not create additional market risk or credit risk for the banking system and could increase Treasury market intermediation. This would align with the broader goal of enhancing the efficiency and resilience of the financial system.
Conclusion
In summary, reforms to the SLR should focus on enhancing its effectiveness as a backstop while addressing the specific challenges posed by low-risk activities such as Treasury market intermediation. Central clearing of Treasury repo transactions, recalibration of the e-SLR surcharge, and the consideration of exempting reserves from TLE are key areas for reform. These measures can help ensure that the SLR functions effectively to safeguard the soundness of U.S. banking firms and the stability of U.S. financial markets.
