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Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules percent leverage requirement equal to 50 percent of a GSIBs higher lossabsorbency risk-based requirements.
This dynamic leverage buffer tailors leverage requirements to business activities and risk profiles, aiming to retain a meaningful calibration of leverage ratio standards while not discouraging firms from participating in low-risk activities. The higher lossabsorbency risk-based requirements is a measure similar to the U.S. banking frameworks GSIB surcharge, which varies in size depending on a banks systemic importance, as measured using a banks size, interconnectedness, crossjurisdictional activity, substitutability, complexity, and use of short-term wholesale funding. In April 2018, the Federal Reserve and the Office of the Comptroller of the Currency OCC
released a similar proposal that would tailor the eSLR for GSIBs by modifying the fixed 2 percent eSLR buffer to equal one half of each firms GSIB capital surcharge.4 This proposal would have a significant impact on the leverage ratios of U.S. GSIBs, decreasing the fixed 2
percent eSLR to, on a median basis, approximately 1.25 percent.
In addition, there have been various proposals in recent years from the U.S.
Department of the Treasury and the U.S.
Congress for a more targeted approach to removing certain items from total leverage exposure to address the negative externalities the SLR and eSLR
requirements may have on market liquidity and low-risk assets. One such proposal included adjustments to the calibration of the eSLR and the leverage exposure calculation to exclude from the denominator of total leverage exposure cash on deposit with central banks, U.S. Treasury securities, and initial margin for centrally cleared derivatives.5 The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 6 adopted part of the Treasurys recommendation by relaxing the leverage ratio for custodial banks by removing funds held at central banks from the leverage ratios denominator. Furthermore, as FHFA did in the ERCF, there is precedent for bank regulators tailoring the leverage ratio to conform to an institutions unique circumstances. As an example, in 2015, the Federal Reserve reduced the eSLR
requirement for GE Capital from 5
percent to 4 percent when it was designated a nonbank systemically 4 https www.federalreserve.gov/newsevents/
pressreleases/bcreg20180411a.htm.
5 https www.treasury.gov/press-center/news/
Pages/Summary-of-Recommendations-forRegulatory-Reform.aspx.
6 Public Law 115174, 132 Stat. 1296 2018.

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important financial institution SIFI by the Financial Stability Oversight Council FSOC.7
The regulatory focus on reevaluating bank leverage ratio requirements has sharpened further during the COVID19
pandemic. In March 2020, to stabilize dislocations in the market for U.S.
Treasuries as a result of the pandemic, the Federal Reserve temporarily modified the SLR to exclude U.S.
Treasury securities and central bank reserves from the leverage calculation.
In March 2021, the Federal Reserve allowed this temporary relief to expire as the strains in the Treasury market resulting from COVID19 had eased, but acknowledged it may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability. 8 After allowing the temporary relief to expire, the leverage ratio became the binding capital constraint for JPMorgan Chase & Co., the largest GSIB. The Federal Reserve also stated that to ensure that the SLR
which was established in 2014 as an additional capital requirementremains effective in an environment of higher reserves, the Board will soon be inviting public comment on several potential SLR modifications. 9 Further, members of the Federal Reserves Board of Governors recently confirmed that the Board is looking to make changes to the leverage framework.10
The current circumstances in which tier 1 leverage capital requirements are binding for both Fannie Mae and Freddie Mac may lead to perverse incentives that have the Enterprises take on more risk than is prudent. By treating all risk similarly, a binding leverage ratio driven by the PLBA may incentivize risk-taking because the capital requirement would be the same for high-risk and low-risk loans. In addition, the Enterprises would have no capital incentive to transfer risk to achieve a risk-based capital requirement lower than their leverage requirement.
However, when risk-based capital requirements are higher than leverage capital requirements, CRT represents a viable way to both lower risk at the Enterprises and to shrink the gap 7 https www.govinfo.gov/content/pkg/FR-201507-24/pdf/2015-18124.pdf.
8 https www.federalreserve.gov/newsevents/
pressreleases/bcreg20210319a.htm.
9 Id.
10 In May 2021, the Boards Vice Chair for Supervision testified to the U.S. House Financial Services Committee: Among other measures, we are reviewing the design and calibration of the supplementary leverage ratio. . .. See https
www.federalreserve.gov/newsevents/testimony/
quarles20210519a.htm.

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between capital requirements and available capital, promoting safety and soundness. These were pressing issues to commenters when FHFA re-proposed its Enterprise capital rule in 2020.
Prior to finalizing the ERCF, FHFA
received a significant number of public comments on FHFAs proposed PLBA.
Some commenters recommended a leverage buffer smaller than was proposed both with and without corresponding recommendations for the leverage requirement. Most commenters focused on the size of the combined leverage requirement and PLBA as a single 4 percent leverage ratio. Most of those commenters recommended a combined leverage ratio smaller than 4 percent. Some suggested that 4 percent overstates potential risk in the Enterprises books because FHFAs ERCF calibration was based on historical losses without adjusting for prevailing portfolio composition. That is, given that the Enterprises are no longer permitted to acquire many of the loans that precipitated the 2008
financial crisis, such as Alt-A loans and option ARMs, a leverage ratio corresponding to the Enterprises current acquisition profile should not be calibrated to losses involving such loans. Relatedly, commenters suggested that concerns the Enterprises may again loosen underwriting standards have been addressed in several ways, including through post-crisis statutory and regulatory changes such as the Qualified Mortgage and Ability-toRepay rule, which would require a statutory change and/or a notice of proposed rulemaking followed by a period of public comment in order to modify. In addition, commenters argued that these concerns were further addressed through post-crisis improvements in risk management and improved loss-mitigation capabilities, incorporation of automated tools into the underwriting process to verify the accuracy of data and detect loan manufacturing defects, tightened counterparty risk management, and improvements in fraud prevention.
Commenters also suggested that the Enterprises recent Dodd-Frank Act Stress Tests DFAST results do not support a 4 percent leverage ratio.
Commenters analysis at the time indicated that 4 percent leverage would be between four and thirteen times DFAST losses, depending on which scenario was being compared.
Commenters suggested this multiple was excessive. In addition, some commenters viewed the PLBA as being duplicative of other ERCF adjustments and buffers that also were designed to mitigate model and related risk. Finally,
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