U.S. Treasury Secretary Scott Bessent announced that regulators are nearing a significant shift in banking regulations by potentially easing the Supplemental Leverage Ratio (SLR). This move is aimed at increasing liquidity in the $30 trillion U.S. Treasury market, boosting bank lending, and reducing pressure on long-term interest rates.
The SLR, implemented after the 2008 financial crisis, requires banks to maintain a capital buffer against all assets, including ultra-safe U.S. Treasurys, which critics say has discouraged banks from trading these securities.
Bank executives argue that the SLR unintentionally inhibits their ability to function as intermediaries in Treasury markets, particularly during periods of volatility. This has resurfaced as a concern due to liquidity issues during the COVID-19 crisis and recent surges in long-term yields, which have intensified scrutiny on the structure of the bond market.
High-ranking bankers like JPMorgan’s Jamie Dimon warn that unless reforms are made, a breakdown in the bond market is inevitable, although the timing remains uncertain.
SLR Easing Aims to Boost Treasury Demand, Lower Yields, and Spur Lending Growth
By relaxing the SLR, Bessent and his allies hope banks will have greater capacity to purchase Treasurys and facilitate smoother market operations. He emphasized that the rule, intended as a backstop, is now functioning as a constraint on banks’ balance sheets. This shift could make it easier for banks to absorb more Treasury issuance, helping to lower yields and reduce the need for the Federal Reserve to intervene directly during periods of market turmoil.
Treasury Eyes SLR Rollback to Boost Bond Market Liquidity, Lending, and Economic StabilitySupport for SLR reform is broad within the banking industry. Goldman Sachs CEO David Solomon called the potential adjustment a vital structural reform, while Jamie Dimon pointed out that easing capital requirements would allow large institutions to act more freely as market makers. The banking industry argues that today’s regulatory framework makes lending less profitable, and that freeing up capital could help spur broader economic activity.
Fed Officials Back SLR Reform Amid Liquidity Concerns, With Caution Over Market Risks
Key Federal Reserve officials have indicated support for reviewing the SLR. Chair Jerome Powell has voiced concern about the Treasury market’s liquidity mismatch and believes recalibrating the SLR could improve its functioning. Michelle Bowman, nominated to be the Fed’s top banking supervisor, also supports changes, pointing to the Fed’s temporary SLR relief in 2020 as evidence of the rule’s rigidity during crisis moments. Her nomination is pending full Senate confirmation.
While many experts agree that revising the SLR could prevent future disruptions in the Treasury market, some warn of potential dangers. They point to the 2023 failure of Silicon Valley Bank as a reminder that bond investments carry risks, especially if interest rates rise sharply. Nevertheless, experts like Georgetown’s James Angel suggest that easing the SLR is unlikely to trigger a future crisis, especially if the reform is approached thoughtfully and accompanied by other safeguards.
