GW Law Faculty Publications & Other Works

Document Type

Article

Publication Date

2025

Status

Working

Abstract

On July 10, 2025, federal banking agencies issued a proposed regulation that would dangerously weaken capital requirements for the largest U.S. banking organizations. The proposed rule would significantly reduce the enhanced supplementary leverage ratio (eSLR) requirements for U.S. global systemically important banking organizations (G-SIBs). If adopted, the proposed rule would allow U.S. G-SIBs to become woefully undercapitalized, as their predecessors were at the outbreak of the global financial crisis of 2007-09. The proposed rule would make U.S. G-SIBs highly likely to fail during future systemic financial crises, with catastrophic consequences for our financial system, economy, and society.

As explained in this Policy Brief, the federal banking agencies should withdraw the proposed rule for the following reasons:

  1. The proposed rule would contravene governing federal statutes, which require federal banking agencies to establish and enforce leverage capital requirements that are effective and binding components of capital standards for the largest U.S. banking organizations.
  2. Strong leverage capital requirements are necessary to prevent large, complex banking organizations from taking excessive risks and manipulating risk-based capital rules to justify dangerously low levels of equity capital.
  3. Federal bank regulators have permitted U.S. G-SIBs to reduce their leverage capital ratios to hazardously low levels by making excessive shareholder distributions, and the proposed rule would allow U.S. G-SIBs to become recklessly undercapitalized.
  4. The proposed rule would expand “too-big-to-fail” subsidies for U.S. G-SIBs and undermine the competitive viability of community banks and regional banks, thereby reducing the availability of credit to consumers, farmers, and small businesses.
  5. The proposed rule would increase the likelihood of a devastating systemic financial crisis by creating a sovereign-bank “doom loop,” in which the survival of U.S. G-SIBs would depend on the stability of the U.S. Treasury market and the credibility of the Federal Reserve System as monetary policy authority and lender of last resort.

GW Paper Series

2025-50

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