Good afternoon, ladies and gentlemen. My name is John Rogers and I am the chairman of the Atlanta Council and we are delighted to welcome you all here for today's Atlantic Council front page.
Now when the United States began building a national system of bank supervision during the Civil War, the task fell to Hugh McCullik. Now McCullik was an interesting choice. He was a banker from the Midwest and initially he had opposed the legislation that created the very system that he would soon be charged with supervising.
But McCulla understood something fundamental about what makes supervision effective. He wrote that a good bank examiner needed a thorough knowledge of practical banking. And McCulla himself traveled extensively to see banks and understand what was happening on the ground. So though more than 160 years later, our financial system would be almost unrecognizable to him. But some truths have endured.
Effective supervision still requires technical expertise and independence. It still requires integrity. And perhaps most importantly, it requires judgment informed by an understanding of how banking actually works.
The dollar sits at the center of the international financial system and American banks and capital markets connect households and businesses and governments around the world. And when stresses emerge in global markets, decisions made at the Federal Reserve can reverberate far beyond Washington.
Now, our geoeconomics center was created to work at the intersection of economics, finance, and foreign policy and to help break down the traditional barriers between financial and political.
And our team examines many of the same questions that are confronting our guest today: how to preserve financial stability while supporting economic growth, how regulation should adapt as technology transforms finance, and how the United States can work with its partners to shape the rules and institutions underpinning the global economy.
Now, to address these issues, we are especially pleased to have with us the vice chairman for supervision at the Federal Reserve. Governor Michelle Bowman is with us today and I couldn't be more delighted because the governor brings a rare and deeply valuable perspective to the Federal Reserve.
Before coming to Washington, she worked at a bank. She worked at Farmers and Drovers Bank in Kansas where she learned community banking firsthand, serving customers, understanding local businesses and families, and making practical judgments about credit and risk. She later served as Kansas State Bank Commissioner, experiencing banking from both sides of the supervisory desk.
First as the banker managing risk just like McCulla and then as a regulator evaluating the safety and soundness of that risk. Now that experience gave her an understanding of banking that cannot be gained solely in academic journals or in Washington salons.
When Congress designated the Federal Reserve Board seat for someone with demonstrated community banking experience, Governor Bowman was the first to be appointed to fill that role. And it was through her work at the Federal Reserve that she was tapped and promoted into her role as vice chairman.
So after her opening remarks, the vice chairman is going to join Josh Lipky, the chairman of our international economics and more importantly the head of our geoeconomics center from its very inception and they're going to have a moderated conversation. So I'd ask you ladies and gentlemen to give a warm welcome to the vice chairman of the Federal Reserve, the distinguished honorable Michelle Bowman. Thank you.
Well, good afternoon and I'd like to thank the Atlantic Council for the invitation to join you today and especially John, your distinguished chairman, for the warm welcome.
It's a pleasure to be with you here today to discuss our work at the Federal Reserve Board and how it interacts with the US Treasury Market. The US Treasury Market plays a foundational role in the US economy. It is central to the transmission of monetary policy, the funding of the federal government, and the stability of the broader financial system.
Because large banks play such a critical role in this market, bank regulations, particularly capital requirements, can significantly impact how well it functions. And this is precisely why we must continuously monitor the effects of our regulations to ensure that they're working as intended.
So today I will discuss the enhanced supplementary leverage ratio or the ESLR, a capital requirement intended to operate as a backstop to risk-based capital requirements in the United States.
As the Treasury market has grown over time, it became apparent that the ESLR was imposing a binding constraint on many large bank dealers, curtailing their capacity to provide liquidity to this market.
This unintended regulatory effect prompted the Federal Reserve to temporarily reduce the effects of the ESLR in the spring of 2020 when the Treasury market experienced severe illiquidity during the onset of the COVID-related tightening in financial market conditions.
In the first six months of my term as vice chair for supervision, the Federal Reserve Board recalibrated the ESLR with that reality firmly in view.
This recalibration was widely acknowledged to be necessary because the ESLR, which was adopted in 2014, did not function as it was originally designed.
So today I will share an initial assessment of how these reforms have affected Treasury market activity and I'll start with the problem with binding leverage requirements.
A leverage capital requirement functions best when it serves as a backstop to risk-based capital requirements because leverage-based capital requirements do not account for the risk of the underlying activities. They can provide an important signal particularly during times of stress and help to support market discipline.
In the United States, the ESLR is a tailored capital requirement that applies only to US GIBs.
The initial framework required each GIB to maintain a supplementary leverage ratio of at least 3% plus a leverage buffer of 2%.
In addition, it required any insured depository institution that is a subsidiary of a GIB to maintain a supplementary leverage ratio of at least 6% to be considered well capitalized.
Under this framework, the ESLR often became a binding constraint rather than operating as a backstop.
When it is binding or could approach binding, the ESLR distorts incentives and activities. As a result, firms reduce participation in lower-risk activities such as intermediating the US Treasury market and they instead pursue higher-risk activities in search of higher returns without facing corresponding increases in capital requirements.
In addition, dealers have also noted their reluctance to expand Treasury holdings simply out of a concern that it could become binding.
This misalignment of incentives drove inefficient capital allocation throughout the financial system, ultimately undermining the very market stability that these requirements were designed to protect.
Research confirms that the ESLR was one of the main constraints on dealers' capacity to intermediate in Treasury markets because it is risk-blind, treating Treasuries the same as riskier asset classes.
In particular, when banks are constrained by the ESLR ratios, they tend to hold smaller Treasury positions, hampering market liquidity, as trading decreased and dealer intermediation margins increased. In addition, following shocks to the size of bank balance sheets, the reduction in Treasury market participation was larger for banks with lower SLRs.
To address this issue, in November of 2025, the board together with the FDIC and the OCC finalized long-overdue and necessary changes to the ESLR standard.
The board recalibrated the ESLR buffer standard for GIBs to equal 50% of a GIB's method one surcharge calculated under the board's GIB surcharge framework rather than the previous leverage buffer standard of 2%.
For GIB depository institution subsidiaries, the ESLR buffer standard is equal to 50% of a GIB's method one surcharge capped at 1%.
The cap recognizes that the method one surcharge of a parent GIB may be partly driven by activities outside of the depository institution subsidiaries of the GIB.
This new approach tailors the ESLR to each GIB's systemic footprint and produces calibration that is consistent with the objective for the supplementary leverage ratio requirements to act as a backstop to risk-based capital requirements.
In addition, it promotes international consistency, aligning the leverage ratio framework published by the Basel Committee for Banking Supervision.
The final rule became effective on April 1st of 2026 with optional early adoption beginning on January 1st of this year. Seven of the eight US GIBs adopted it early in the first quarter.
So I'll tell you about some early results that we found so far. The impact of this recalibration has been encouraging. So far this year, evidence shows that leverage ratio reforms have improved Treasury market functioning and strengthened its resilience to stress by relaxing regulatory balance sheet constraints.
According to some estimates, the parent bank holding companies of the six dealers gained nearly $5 trillion of additional ESLR headroom in Q1 of 2026, the first quarter during which the modified rule was applied.
Recent supervisory data also shows clear benefits from this regulatory treatment. Following the ESLR revisions, dealers increased their Treasury market positions as all of the largest banks benefited from significantly greater headroom.
Our supervisory data show that dealers' total Treasury positions have increased from roughly $600 billion at the beginning of the modification period to over $700 billion at the end of April.
This increase was concentrated among the firms that had consistently maintained the lowest ESLR buffers over the previous 24 months and were constrained by the ESLR.
This pattern suggests that the sharp increase in positions was driven by dealers taking advantage of additional headroom created by the modification.
This has translated into greater balance sheet capacity at dealer subsidiaries. And the revised ESLR standard provides additional headroom for firms to increase their overall Treasury holdings using their existing capital base and enables them to support other low-risk but balance-sheet-intensive market-making activities like Treasury market intermediation.
It has also created a structural increase in balance sheet capacity for banks that were constrained prior to the rule change. For these firms, additional capacity was deployed to dealer subsidiaries.
While all US GIBs seem to have benefited from the ESLR relief, only a few of them utilized additional balance sheet capacity for US Treasury activities.
This analysis is confirmed by a forthcoming research note prepared by Federal Reserve Board staff members examining how the new ESLR rule affected dealers' Treasury market activity.
The note finds that dealers' Treasury positions increased notably after the rule was implemented and the increase was driven by banks with the lowest ESLR buffers and that were more constrained by the prior rule.
These findings are also reinforced by our market outreach. Market contacts have cited the lower ESLR requirements for US GIBs as a primary driver behind the decrease in capital constraints for bank holding companies.
One dealer reported that leveraged capacity at GIBs surged from $1.8 trillion in the fourth quarter of 2025 to $6.4 trillion after the new rule took effect.
Banks have been actively deploying this increased capacity with leveraged exposure across GIBs increasing by approximately $900 billion.
Some institutions directly attributed the increase in their Treasury holdings and repo market activity to the ESLR recalibration as reflected in the March 2026 senior financial officer survey.
In targeted outreach to individual firms, market participants highlighted that by expanding GIB balance sheet capacity, the lower ESLR requirements improved Treasury and money market liquidity and functioning.
Dealers play a central role in the market by warehousing and distributing Treasuries and arbitraging markets. As a result of the ESLR revision, these important market makers have greater capacity to effectively intermediate a growing market, both by helping to smooth price changes on days where there is sizable Treasury issuance and by continuing to make markets in periods of greater market volatility.
We're seeing other market improvements as well. Recently, dealers have increased their holdings of Treasury securities and hedged these positions by shorting Treasury futures.
This increase in dealer holdings has likely absorbed some positions that were previously held predominantly by hedge funds as part of the cash-future basis trade.
These conditions are likely to lessen the influence in Treasury markets of investors holding highly leveraged trading positions that are particularly vulnerable to adverse shocks in funding, cash, or derivatives markets.
This change supports Treasury market resilience by limiting the potential for a sell-off in cash securities amid volatile conditions, therefore reducing the likelihood of market dislocation.
The expanded bank dealer capacity has enabled some market participants to reduce their exposures without significant market disruption.
And we can already see improved market liquidity and functioning across these markets through narrower bid-ask spreads, reduced intraday volatility during auction cycles, calmer funding conditions, and greater price stability during periods of elevated supply.
All of this indicates that dealer intermediation is successfully absorbing flows that could have previously caused more pronounced market dislocations.
Perhaps most importantly, these reforms deliver their greatest value when it matters most. That is during periods of market stress.
As many market participants have noted, while they may not face near-term ESLR constraints in normal times, the real benefit of the recalibration is eliminating the likelihood of becoming constrained during risk-off or surge activity events, precisely when market liquidity is most crucial.
So I'll turn to the broader lesson which in my mind is the importance of regulatory modernization.
The success of the ESLR recalibration underscores a critical principle of financial regulatory oversight. We must continuously revisit and modernize our regulations when observations and data reveal frictions or indicate that a rule is no longer functioning as it was intended.
This is not merely good policy. It is a legal requirement. We are obligated by law to periodically review our regulations to ensure that they serve their intended purpose, whether that relates to market functioning or the safe and sound operation of financial institutions.
Regulations should adapt as conditions evolve and as we gain experience with how the rules operate in practice. When evidence shows that a regulation is creating adverse unintended consequences, we have a responsibility to act.
The ESLR experience demonstrates that thoughtful recalibration grounded in sound analysis and market feedback can meaningfully improve both market resilience and the efficiency of our regulatory framework.
This commitment to ongoing regulatory review will continue to guide our approach, ensuring that our rules remain effective, proportionate, and aligned with their fundamental objectives. Thank you very much for the opportunity to share my views on our ESLR rule with you today, and I look forward to our conversation.
