Federal Reserve Considers Loosening Leverage Rules to Enhance Banking Capacity in Treasury Markets

news: Potential overhaul of banking regulations under the Trump administration, focusing on the Supplementary Leverage Ratio (SLR) and its impact on Treasury markets.">

October 9, 2025

Washington D.C. – The Trump administration is poised to enact a notable change in financial policy-a sweeping deregulation of the banking sector.This move, largely unnoticed amidst other political developments, centers on a potential reform of the Supplementary Leverage Ratio (SLR), a key regulatory metric for U.S. Banks.

New Leadership at the Federal Reserve

The shift began in early January with the departure of Michael Barr, the Federal Reserve’s Vice Chair for Supervision, who was instrumental in shaping banking regulations. President Trump subsequently appointed Michelle Bowman as the new Vice Chair for Supervision. Bowman recently articulated a clear direction for regulatory adjustments in a pivotal speech.

Bowman indicated a willingness to modify the SLR, stating that proactive measures should be taken to ensure banks possess sufficient capital to support Treasury markets. She specifically suggested revisiting the leverage ratio and G-SIB surcharge regulations applicable to the nation’s largest financial institutions. Her core argument? Addressing potentially “over-calibrated” leverage ratio requirements is prudent “while the sun is shining.”

Understanding the Supplementary Leverage Ratio

the Supplementary Leverage Ratio (SLR) is a crucial component of banking regulation. It mandates that U.S. banks maintain a specific amount of capital in relation to their total assets, including even highly secure instruments like U.S. Treasury bonds. During the height of the 2020 pandemic, the Federal Reserve temporarily exempted Treasuries from the SLR calculation to facilitate bank support for the bond market without triggering regulatory penalties. That exemption has as expired.

Though, a permanent alteration to the SLR is now under consideration. Currently, U.S. banks face constraints when acquiring substantial volumes of U.S. Treasuries. A reform exempting these securities from the SLR calculation could unlock trillions of dollars in balance sheet capacity, empowering banks to invest more freely in government bonds.

Regulation	Current Status	Potential Change
SLR	Requires capital against total assets (including Treasuries).	exemption of treasuries from SLR calculation.
G-SIB Surcharge	Additional capital requirements for Globally Systemically Significant Banks.	Potential adjustments based on reviewed calibration.

Did You Know? The SLR was initially implemented following the 2008 financial crisis to reduce excessive risk-taking by banks.

Potential Market Implications

This regulatory shift could reshape the dynamics of the U.S. Treasury market. While some anticipate that international investors might modestly reduce their holdings of U.S. debt in response to these policy changes,the potential influx of capital from U.S.banks could offset such movements.

Pro Tip: Monitoring the Federal Reserve’s upcoming meetings and official statements will be key to understanding the trajectory of SLR reform.

The proposed reforms carry implications beyond the realm of finance. Changes to the SLR could influence interest rates, the availability of credit, and the overall stability of the financial system. The impact on economic growth and inflation remains to be seen.

The evolving Landscape of Banking Regulation

Banking regulation has been a continuous process of adaptation, evolving in response to economic conditions and financial crises. The Dodd-Frank Act of 2010, enacted in the wake of the 2008 crisis, introduced significant reforms to enhance financial stability. However, subsequent administrations have adjusted these regulations, reflecting differing priorities and economic philosophies. The current push for SLR reform reflects a desire to balance financial stability with the need to support economic growth and market liquidity. According to the Bank for International Settlements, global bank capital levels remain robust, providing a buffer against potential shocks as of September 2024.

Frequently Asked Questions About the SLR

• What is the Supplementary Leverage Ratio? It’s a regulatory requirement for banks to hold capital relative to their total assets, including safe assets like U.S. Treasuries.
• Why is the SLR being considered for reform? Banks argue it limits their ability to purchase and support the Treasury market.
• What could be the impact of exempting Treasuries from the SLR? It could free up trillions of dollars in bank balance sheet capacity.
• What was the Fed’s temporary exemption during the pandemic? It was designed to ensure banks could support the bond market without breaching SLR limits.
• Who is Michelle Bowman? She is the current Vice Chair for Supervision at the federal Reserve.
• How does the SLR affect interest rates? Changes to the SLR can influence the supply and demand for bonds, ultimately impacting interest rates.
• Is this deregulation a reversal of past financial regulations? It represents a potential shift away from stricter regulations implemented after the 2008 financial crisis.

will the Trump administration ultimately move forward with this significant deregulation? The coming months will be critical in determining the future of banking regulation in the United States.

What are your thoughts on the potential impact of these changes? Share your opinion in the comments below!

How might adjusting the SLR specifically for Treasury holdings affect banks’ incentives to engage in other forms of lending, and what are the potential systemic risks?

Understanding the Proposed Changes to Bank Leverage Ratios

The Federal Reserve is actively evaluating potential adjustments to bank leverage rules, specifically concerning their capacity to participate in the U.S. Treasury market. This isn’t a radical overhaul, but a nuanced consideration of how regulations – designed to ensure financial stability – might be inadvertently hindering smooth market functioning. The core issue revolves around the Supplementary Leverage Ratio (SLR),a key metric used to assess a bank’s capital adequacy. Currently, the SLR requires banks to hold a certain amount of capital relative to their total leverage exposure.

The debate centers on whether the current SLR requirements are sufficiently flexible to accommodate increased Treasury holdings without forcing banks to curtail other lending activities.Increased Treasury issuance,driven by government spending,necessitates robust demand from financial institutions.If banks are constrained by leverage ratios, it coudl lead to reduced liquidity in the Treasury market and potentially higher borrowing costs for the government.

The Role of the Supplementary Leverage Ratio (SLR)

the SLR, implemented after the 2008 financial crisis, is a simple measure of capital relative to a bank’s total exposures. It’s calculated as tier 1 capital divided by total leverage exposure. A higher SLR indicates a stronger capital position.

Here’s a breakdown of key aspects:

* Current SLR Requirement: For large banks, the current SLR is generally 7%.

* Treasury Securities & Central Bank Reserves: Treasury securities and reserves held at the Federal Reserve are generally treated as zero-risk weighted assets under the SLR, meaning they consume capital without providing an offsetting risk reduction benefit. This is a critical point in the current discussion.

* Impact on Bank behavior: The current SLR structure can disincentivize banks from holding larger quantities of Treasuries,potentially limiting their ability to support government financing needs.

Why the Fed is Reconsidering Leverage Rules

Several factors are driving the Fed’s reassessment of leverage regulations:

* Increased Treasury Issuance: Significant government spending programs have led to a substantial increase in Treasury bond and bill issuance.

* Demand-Supply Imbalance: Meeting this increased supply requires strong and consistent demand from market participants, including banks.

* Potential Market Dysfunction: If banks are unable or unwilling to absorb the increased Treasury supply due to leverage constraints,it could lead to market illiquidity and price volatility.

* Global Economic Uncertainty: Geopolitical risks and economic slowdowns in other major economies are increasing the need for a stable and well-functioning U.S. Treasury market as a safe haven asset.

* Recent banking Sector Stress: the regional banking crisis in early 2023 highlighted vulnerabilities within the banking system and prompted a broader review of regulatory frameworks.

Potential Adjustments to the SLR – What could Change?

The Federal reserve is considering several options to address the concerns surrounding bank capacity in the Treasury market.These include:

1. Exempting U.S. Treasury Securities and Central bank Reserves: The most discussed option is to exclude U.S. Treasury securities and central bank reserves from the calculation of total leverage exposure. This would effectively reduce the capital required to hold these assets, encouraging banks to increase their Treasury holdings.
2. Tiered SLR Requirements: Implementing a tiered SLR system, where the requirement varies based on a bank’s size and risk profile.This would allow smaller, less complex banks to operate with lower leverage ratios.
3. Modifying the SLR Calculation: Adjusting the formula used to calculate the SLR to better reflect the risk profile of different assets.
4. Temporary Adjustments: Implementing temporary adjustments to the SLR during periods of heightened Treasury issuance or market stress.

Benefits of Loosening Leverage Rules for Treasury Markets

Easing leverage rules, if implemented carefully, could offer several benefits:

* Enhanced Market Liquidity: Increased bank participation in the Treasury market would improve liquidity, making it easier for the government to finance its operations.

* Lower Borrowing Costs: Greater demand for Treasuries could help to keep borrowing costs lower for the government.

* Reduced Market Volatility: A more liquid and stable Treasury market would be less susceptible to price swings.

* Support for Economic Growth: Lower government borrowing costs could free up resources for other economic priorities.

* Improved Financial System Resilience: A well-functioning Treasury market is crucial for the overall stability of the financial system.

Risks and Considerations

While loosening leverage rules could offer benefits,it’s crucial to acknowledge the potential risks:

* Increased risk-Taking: Lower leverage requirements could incentivize banks to take on more risk.

* financial Instability: Excessive risk-taking could potentially lead to financial instability.

* Moral Hazard: Banks might assume the Federal Reserve will intervene to protect them in times of crisis, encouraging reckless behavior.

* Inflationary Pressures: Increased lending activity could potentially contribute to inflationary pressures.

* regulatory Arbitrage: Banks may exploit loopholes in the regulations to circumvent the intended effects.

Case Study: Japan’s Experience with Negative Interest Rates and Bank Lending

Japan’s experience with negative interest rates provides a cautionary tale. While intended to stimulate lending, the policy had limited success and, in some cases, negatively impacted bank profitability. This highlights the importance of considering the broader economic