Has US eSLR Recalibration Improved Treasury Market Liquidity?

Original eSLR Design and Unintended Consequences

The enhanced supplementary leverage ratio (eSLR), adopted in 2014, was designed to function as a backstop to risk-based capital requirements for US global systemically important institutions (GSIBs).

This framework mandated a supplementary leverage ratio of at least three percent, plus a two percent leverage buffer for GSIBs, and a six percent ratio for their insured depository institution subsidiaries to be considered 'well capitalised'.

However, this capital requirement frequently became a binding constraint rather than a secondary safeguard, as explained by Ms Michelle W Bowman, Vice Chair for Supervision of the Federal Reserve System, in a speech delivered on 1 October 2026.

This unintended effect curtailed large bank dealers' capacity to provide liquidity to the US Treasury market, a situation that became acutely apparent during the severe illiquidity experienced in March 2020.

Distorted Incentives and Market Stability

When the eSLR operated as a binding constraint, it distorted incentives across the financial system. Because leverage-based capital requirements do not differentiate based on the risk of underlying assets, the eSLR treated US Treasuries similarly to riskier asset classes.

This led firms to reduce their participation in lower-risk, lower-return activities, such as intermediating the US Treasury market, in favour of higher-risk pursuits without a corresponding increase in capital requirements.

Research cited by Ms Bowman confirms that the eSLR was a primary constraint on dealers' capacity to intermediate in Treasury markets, leading to reduced Treasury holdings, decreased trading, and increased dealer intermediation margins. This misallocation of capital ultimately undermined the market stability that the regulations aimed to protect.

Recalibration of the eSLR Standard

To address these issues, the Federal Reserve Board, alongside the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, finalised necessary changes to the eSLR standard in November 2025.

The recalibrated standard aligns the eSLR buffer for GSIBs to 50 percent of their method-1 surcharge, calculated under the Board's GSIB surcharge framework, replacing the previous two percent leverage buffer. For GSIB depository institution subsidiaries, the buffer is capped at one percent, also based on 50 percent of the parent GSIB's method-1 surcharge.

This new approach, effective April 1, 2026, with optional early adoption from January 1, 2026, aims to tailor the eSLR to each GSIB's systemic footprint, ensuring it acts as a backstop to risk-based capital requirements. Seven of the eight US GSIBs adopted the new standard early in the first quarter of 2026.

Initial Observations on Market Activity

Ms Bowman, speaking on 1 October 2026, shared an initial assessment indicating an encouraging impact from these regulatory reforms on US Treasury market activity.

While specific quantitative data was not detailed in her remarks, the recalibration was intended to alleviate the binding constraint on GSIBs, thereby enhancing their capacity to intermediate in the Treasury market and improve liquidity.

The Federal Reserve Board's action was widely acknowledged as necessary due to the eSLR's failure to function as originally designed since its 2014 implementation. The new framework also promotes international consistency, aligning with the leverage ratio guidance published by the Basel Committee for Banking Supervision.

Implications for Asian Financial Regulators

This recalibration of the US eSLR, particularly its alignment with the Basel Committee's leverage ratio framework, holds relevance for Asian financial regulators. Many jurisdictions in Asia adhere to Basel III standards for capital requirements, including those for their own systemically important financial institutions.

Regulators in markets such as Singapore, Hong Kong, and Japan, which host significant global banking operations, will likely observe the outcomes of these US reforms closely.

The experience of the US Federal Reserve in adjusting leverage ratios to prevent unintended liquidity constraints in a crucial sovereign debt market could inform future policy considerations for ensuring stable and liquid domestic bond markets across Asia, especially as regional economies manage their own public debt profiles and financial stability objectives.