Banks' Supplementary Leverage Ratio

Views and opinions expressed are those of the authors and do not necessarily represent official positions or policy of the OFR or Treasury.

In April 2024, the OFR’s Bank Systemic Risk Monitor (BSRM) was enhanced to include the Supplementary Leverage Ratio (SLR).¹ The SLR was established in 2014 as part of the Basel III reforms. It measures a bank’s Tier 1 Capital relative to its total leverage.² Total leverage includes certain off-balance sheet exposures not used to measure a bank’s Tier 1 leverage ratio. Off-balance sheet exposures can obscure leverage, and they were partially responsible for the failure of some institutions during the 2007-09 financial crisis.

Banks subject to specific Federal Reserve’s prudential standards must maintain an SLR of at least 3%.³ However, the eight U.S. global systemically important banks are subjected to the enhanced SLR, which effectively requires them to maintain an SLR of at least 5%.

Figure 1 presents the average SLR for the universe of banks in the BSRM. The banks are grouped into six categories: 1) universal banks, 2) broker-dealers, 3) banks that primarily provide operating services such as custody and clearing services (transaction services banks), 4) banks that focus primarily on retail customers and credit card issuance (retail/credit card issuers), 5) U.S. operations of foreign banks (FBOs), and 6) regional banks. Figure 1 shows that universal banks and broker-dealers have the lowest SLRs. Generally, these groups hold more Treasuries and repurchase agreements (repos), which reduces their SLR. Retail/credit card issuers and FBOs have the highest SLRs.

The SLRs for most bank groups rose year-over-year in 2023 due primarily to higher Tier 1 Capital levels offset by balance sheet growth and more repo exposure. Broker-dealers saw a decrease in SLRs due to increased derivatives and repo exposures. SLRs for FBOs were slightly lower because of growth in Tier 1 Capital levels that was offset by a general reduction in on- and off-balance sheet assets. Over time, SLRs for each group have remained in a narrow range. The exception occurred in the 2020 pandemic. On April 1, 2020, the Federal Reserve announced an interim final rule that temporarily excludes U.S. Treasuries and central bank reserves from the SLR. This rule aimed “to ease strains in the Treasury market resulting from the coronavirus and increase banking organizations’ ability to provide credit to households and businesses.”⁴

During the early days of the pandemic, investors sold securities (primarily Treasuries) and increased their cash holdings. As a result, banks’ deposits and Treasury holdings sharply increased, requiring them to hold more capital under the SLR. Excluding banks’ Treasury holdings and reserves eased this constraint for most banks. The retail/credit card group of banks was the exception. The interim final rule expired on March 31, 2021, by which time Treasury markets had stabilized.⁵ Given the growth in the issuance of Treasury securities, there has been interest in preventing future strains in Treasury markets.

In July 2023, the Federal Reserve, the Office of Comptroller of the Currency, and the Federal Deposit Insurance Corporation jointly issued a notice of proposed rulemaking (NPR) that would expand the SLR’s coverage. The NPR proposes that banks with assets over $100 billion be subject to the SLR, affecting many banks not currently subject to it. The potential inclusion of more banks subject to the SLR reflects its value in measuring banks’ leverage and mitigating systemic risk.

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