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1 [1] (August 5, 2025)

handle is hein.crs/sgihsgr0001 and id is 1 raw text is: Congressional Research Service Inforrning the legislative debate since 1914 6mnmemsmom August 5, 2025 Bank Capital Requirements and Treasury Market Resiliency Banks play an important role in Treasury markets, where investors trade federal debt. Congress has focused on Treasury market resilience, which is necessary to finance federal borrowing and maintain broader financial stability. The enhanced supplementary leverage ratio (eSLR) is a capital requirement that applies to the eight globally systemically important banks (G-SIBs). In June 2025, the federal bank regulators proposed a rule to reduce the eSLR to make it a backstop to risk-based capital requirements that does not discourage [the G-SIBs] from engaging in low-risk activities, such as Treasury market making. Improved market making could make Treasury markets less fragile. But lower capital requirements could make the G- SIBs more likely to fail and cause financial instability. Background Treasury Market Fragility Treasury markets are typically highly liquid-trading is relatively robust and at low cost. However, Treasury cash or lending markets have recently had short-lasting bouts of instability in 2014, 2019, 2020, and 2025, where liquidity suddenly dried up. In each case, calm was quickly restored, sometimes through injections of liquidity by the Federal Reserve (Fed). None of these episodes had broader, lasting negative effects on the financial system. Historically, Treasury markets were less regulated than other securities markets. In addition to the June eSLR proposal, policymakers have initiated a series of reforms to make Treasury markets more resilient. Some of these reforms have been largely implemented, such as greater transparency, debt buybacks, and new standing Fed facilities. Some have been finalized but are not yet in effect, such as more central clearing. Some have been abandoned, such as registration requirements for market participants. Role of Banks in Treasury Markets Most banks hold Treasuries as investments. Large banks are required to hold a minimum amount of liquid assets, such as Treasuries. Banks holding Treasuries as long-term investments does not affect Treasury market resilience. In addition, most primary dealers, who are the largest broker-dealers in Treasury markets, are owned by either large domestic or foreign banks. Broker-dealers (also called Treasury dealers in the context of Treasury markets) are market makers in bond markets: They hold an inventory of securities to fulfill client orders to buy, sell, borrow, and lend. For the market to be liquid, broker-dealers must be willing to increase their inventories when more clients want to sell and decrease their inventories when clients want to buy. Broker-dealers are not the only major institutional participants in the Treasury market, but they are the only ones that routinely act as market makers. What Is the eSLR? Capital adequacy is one of the primary safeguards against bank insolvency. Safety and soundness regulation requires banks to maintain various capital-to-asset ratios or face remedial actions. One of these capital requirements is the leverage ratio. Unlike risk-weighted capital ratios, in the leverage ratio all assets are counted at full value. The G-SIBs must meet an eSLR of 5% company-wide and 6% for their bank subsidiaries to avoid restrictions on dividends, buybacks, and bonuses. The eSLR includes assets and (unlike the leverage ratio) off-balance-sheet exposures in the denominator. It is the ratio of Tier 1 capital in the numerator and unweighted exposures in the denominator. Tier 1 capital is high-quality, loss-absorbing forms of capital, such as common equity. For more information, see CRS Report R47447, Bank Capital Requirements: A Primer and Policy Issues. What Are the G-SlBs? The G-SIBs are the eight banks (see Table 1) that regulators believe pose the greatest risk to financial stability if they were to fail. They are subject to the most stringent safety and soundness regulations, including the eSLR and an additional G-SIB surcharge, which is added to their risk- weighted capital requirements based on each's systemic importance. For more information, see CRS Report R47876, Enhanced Prudential Regulation of Large Banks. How Does the eSLR Affect Treasury Markets? Banks must simultaneously comply with multiple capital requirements, some risk-weighted and some unweighted. At a given point in time, whichever one requires the most capital is the binding requirement for any given bank. Leverage ratios, such as the eSLR, require banks to hold the same amount of capital against relatively low-risk assets (such as Treasury securities) as they are required to hold against high-risk assets. But leverage ratios discourage banks from holding Treasuries only if they are the binding (or close to binding) requirement. If risk-weighted requirements are binding, then banks face little disincentive to hold Treasuries, because their risk weight is zero. What Is T LAC? G-SIBs are also required to hold minimum total loss absorbing capacity (TLAC) at the holding company level that is composed of Tier 1 capital and long-term debt. TLAC is intended to bail in creditors and recapitalize a failed G-SIB. There are currently weighted and unweighted TLAC requirements-the latter is tied to the eSLR. igross.gov