Introduction & Context
After 2008, Basel III rules introduced the SLR to ensure banks had adequate capital. Critics claim the ratio over-penalizes banks for holding super-safe Treasurys. The COVID-19 pandemic spurred temporary SLR relief, suggesting regulators might make some aspects permanent.
Background & History
Sizable expansions in Treasury issuance, combined with banks’ fixed capital requirements, can reduce banks’ capacity to intermediate in bond markets. The Fed briefly exempted Treasurys from the SLR calculation, easing constraints. Now permanent changes are on the table.
Key Stakeholders & Perspectives
Large banks like JPMorgan or Citigroup highlight that Treasurys remain ultra-safe, thus requiring less capital backing. Regulators must weigh financial stability—one reason for SLR’s original design was preventing over-leveraging. Bond market participants prefer more liquidity, hoping reforms avert volatility.
Analysis & Implications
Relaxing the SLR might encourage banks to hold more Treasurys or lend more, which could help the government finance deficits at stable rates. Opponents fear complacency: less capital on hand can magnify future crises. Ultimately, the precise ratio or exemptions matter greatly.
Looking Ahead
Regulators are expected to propose adjustments soon, possibly carving out Treasurys or reducing the overall ratio. Congress may weigh in, though final authority rests largely with the agencies. Market watchers anticipate some shift by year-end, potentially influencing yields and credit availability.
Our Experts' Perspectives
- Bank strategists hail it as a necessary modernization, noting surging Treasury supply.
- Financial reform advocates recall 2008’s collapse, urging caution about bank leverage.
- Academic economists see potential short-term bond market benefits but demand robust stress tests to offset reduced SLRs.