Federal Reserve Vice Chair for Supervision Michelle Bowman said on October 1 that the enhanced supplementary leverage ratio (eSLR) reform has expanded banks' dealer capacity to participate in the U.S. Treasury market.
Regulatory data show that dealers' total Treasury holdings rose from about $600 billion at the start of the rule adjustment period to more than $700 billion by the end of April this year, with the increase concentrated among institutions previously more constrained by leverage requirements.
Holdings growth concentrated in institutions previously more constrained
Speaking at a conference in Washington, Bowman disclosed that the increase in holdings came mainly from institutions that had persistently maintained lower eSLR buffers over the past 24 months. She said this distribution indicates that some dealers are using the balance sheet capacity released by the reform to expand their Treasury operations.
She also noted that U.S. global systemically important banks (G-SIBs) generally gained additional capacity from the rule adjustment, but only a few institutions used the new capacity for Treasury activities. That divergence was also reflected in the Fed's March Senior Financial Officer Survey. Of eight U.S. G-SIBs, two said the reform had increased or was expected to increase repo business for themselves and affiliated dealers, while the other six reported no change. On non-reserve primary securities holdings, five said there was no impact, two were still uncertain, and one expected or had already increased holdings.
Why easing leverage constraints can expand Treasury business
Banks are simultaneously subject to risk-weighted capital requirements and leverage requirements. The former sets required capital based on asset risk, while the latter is calculated mainly on total exposure and draws limited distinction between the risks of different assets. When the leverage ratio becomes the binding constraint, lower-risk, lower-return businesses such as Treasuries also consume banks' capital space, weakening dealers' willingness to expand holdings and make markets.
Regulators finalized the reform in November 2025, adjusting G-SIBs' previously fixed 2% leverage buffer to half of their method one G-SIB surcharge. Depository institutions under their umbrella use the same calculation method, with the buffer capped at 1%, and with the 3% base requirement added, the total requirement does not exceed 4%. The new rules officially took effect on April 1, 2026, and banks were allowed to adopt them early starting January 1.
Regulators said the adjustment aims to make the leverage ratio more of a backstop to risk-weighted capital requirements and reduce its restraint on low-risk activities such as Treasury intermediation.
How more trading capacity improves market absorption
Bowman said that with more room for holdings and market making, dealers can absorb trading demand when Treasury issuance is heavy or market volatility intensifies. The improvements she listed include narrower bid-ask spreads, lower intraday volatility during auctions, and more stable financing conditions.
When publishing the final rule, regulators estimated that the aggregate tier one capital requirement for affected bank holding companies would fall by less than 2%, and that the overall capital level actually maintained by the banking system would remain roughly unchanged. Although depository institutions under their umbrella saw larger reductions in capital requirements, those capital resources generally still need to remain within the group due to capital constraints at the holding company level and cannot be directly used for distributions to external shareholders. The reform thus gives banks more flexibility to allocate business capacity on the basis of existing capital.
Together, the March survey and the holdings distribution disclosed by Bowman show that institutions still differ in the extent to which they use this capacity for Treasury and repo business.