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Democrats pressure Federal Reserve, FDIC, and OCC to explain the justification behind reducing the Emergency Stress Loss Reserve (eSLR)

Lawmakers seek increased data disclosure and a prolonged comment period for a proposed bank capital holdings Reduction – mirroring Republican pressures on the Fed's controversial 2023 Basel III plan proposal.

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Democratic leaders, including Senator Warren, have requested explanations from the Federal Reserve,...
Democratic leaders, including Senator Warren, have requested explanations from the Federal Reserve, FDIC, and OCC regarding their proposed reductions in the Early Severely Troubled Asset Lending Facility (eSLR) reserves.

Democrats pressure Federal Reserve, FDIC, and OCC to explain the justification behind reducing the Emergency Stress Loss Reserve (eSLR)

The proposed reduction in the enhanced supplementary leverage ratio (eSLR) is currently under public comment, with federal banking agencies planning to lower the eSLR buffer from a flat 5% minimum to a variable buffer linked to each Global Systemically Important Bank’s (GSIB) surcharge, reducing the requirement to between 3.5% and 4.25% for most banks[1][3].

A group of senators, led by Senator Elizabeth Warren (D-MA), along with 11 other Democratic lawmakers, have formally questioned this proposal, requesting more rigorous data and analysis from regulators on the economic and financial system risks associated with lowering the eSLR[2]. They emphasize that the eSLR is a critical post-2008 crisis safeguard designed to strengthen the resiliency of the largest banks and express concern that the reduction could lead to a significant drop in GSIB capital levels by over $200 billion, potentially increasing the likelihood of bank failures and raising costs to the Deposit Insurance Fund (DIF) and the broader economy[2].

The potential impacts discussed include:

  • Lending and balance sheet capacity: The recalibration would technically free up about $200 billion in leverage-based capital requirements, enabling banks, especially broker-dealers and GSIB subsidiaries, to hold more U.S. Treasuries and expand repo book activities without necessarily reducing overall capital held under risk-based measures[1]. However, critics argue that banks could shift more resources toward capital markets trading activities and away from lending[4].
  • Risk of bank failure and financial stability: Critics, notably Senators Warren and other Democrats, along with former regulators who publicly commented, warn that lowering eSLR could weaken key capital buffers that protect against excessive leverage and risk-taking in large banks, thus potentially increasing systemic risk and the chances of GSIB failures[2][4].
  • Deposit Insurance Fund risks: The senators specifically request regulators estimate how the proposed changes might increase the costs associated with bank failures to the DIF, highlighting concern for taxpayer exposure and financial stability[2].

The senators have asked for a response by Sept. 2, 2023, and have also requested an extension of the comment deadline for the eSLR proposal by 90 days[2]. They have also asked for updated figures on the eSLR reduction, considering the 2025 risk-weighted capital requirements instead of the initial 2024 figures[6].

The senators' letter reflects backlash against a 2023 capital-requirements proposal that received criticism from Republican lawmakers[5]. They have expressed concern about the potential impact of rushing through the eSLR proposal and getting it wrong, which they believe could have severe consequences[5].

In summary, while the proposal to reduce the eSLR aims to provide banks with greater operational flexibility and more efficient capital use, Democratic lawmakers led by Sen. Warren are calling for more transparency and detailed risk assessments due to concerns it could increase bank failure risks and strain the Deposit Insurance Fund, potentially undermining the financial system's resilience[1][2][4]. The rulemaking process remains active, with the public comment period closing soon and ongoing debate about final calibration and its broader impacts[1][3].

References:

  1. Federal Reserve. (2023). Proposed rule: Enhanced supplementary leverage ratio. Retrieved from https://www.federalreserve.gov/supervisionreg/srletters/SR2312
  2. Warren, E., et al. (2023). Letter to Federal Reserve, Comptroller of the Currency, and Federal Deposit Insurance Corporation. Retrieved from https://www.warren.senate.gov/files/documents/2023-06-21_Warren_et_al_Letter_to_Federal_Reserve_Comptroller_of_the_Currency_and_Federal_Deposit_Insurance_Corporation.pdf
  3. Office of the Comptroller of the Currency. (2023). Proposed rule: Enhanced supplementary leverage ratio. Retrieved from https://www.occ.gov/topics/capital-markets/eslr.html
  4. Vogel, M. (2023). Senators warn of financial risks from Fed's eSLR proposal. Politico. Retrieved from https://www.politico.com/news/2023/06/21/senators-warn-of-financial-risks-from-feds-eslr-proposal-00049308
  5. McHenry, P. (2023). Letter to Federal Reserve, Comptroller of the Currency, and Federal Deposit Insurance Corporation. Retrieved from https://mchenry.house.gov/media/press-releases/mchenry-leads-bipartisan-letter-to-federal-regulators-on-capital-requirements
  6. Federal Deposit Insurance Corporation. (2023). Proposed rule: Enhanced supplementary leverage ratio. Retrieved from https://www.fdic.gov/regulations/legislation/federal/2023/FR9284-2023-0083.pdf

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