Davis Polk partner Luigi De Ghenghi was quoted in the American Banker discussing the bank regulators’ proposed changes to the enhanced supplementary leverage ratio (eSLR), which determines the minimum amount of equity banks must hold relative to their assets.

Luigi said that the idea that capital would be shifted from bank depositories to their holding companies is “misplaced,” noting that such a transfer would not only face mechanical hurdles – namely that doing so would count as a dividend that would be subject to regulatory approval – but it would also be imprudent management.

“At both the holding company level and bank level, you’re still going to manage yourself to these buffers,” Luigi explained. “It’s just that the consequences of not having 100% of your buffer aren’t as dire as they are for failing to be well capitalized.”

He added that the direct capital relief from the proposed changes would only be enjoyed by the handful of banks that are bound by the eSLR.

“For the banks where the risk-based capital requirements are the binding capital constraints, there will be no relief at all,” he continued.

Luigi concluded that much will depend on the final version of the new SLR rule. He said banks would still like to see at least some Treasury exposures excluded from the calculation to meaningfully increase their intermediation, noting that some of the alternatives considered in the proposal left the door open to that outcome.

“The regulators have proposed these interesting alternatives that are meant to say, ‘OK, we’ve played with the ratio and made sure that it’s a buffer, but we haven’t excluded anything from the denominator – and we know that’s what a lot of the banks want, some exclusion from the denominator,’” he said. “So we’ll see what the comments look like.”

“Stability is the SLR proposal’s goal — but it’s no guarantee,” American Banker (July 1, 2025) (subscription required)

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