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The US Federal Reserve Board (FRB) confirmed on Friday that changes to the supplementary leverage ratio (SLR) will expire at the end of this month as planned, with changes on the cards for the capital holding regulation.
The FRB took the action last year to exclude US treasury securities and central bank reserves from the SLR to encourage lending to households and businesses. But now, the regulator says, the treasury market has “stabilised” and, going forward, it will seek input on several potential changes to the SLR.
The move comes after US House Committee on Financial Services’ chair Maxine Waters wrote a letter imploring various federal financial bodies and President Biden to not let Wall Street off the hook and to reinstate pre-COVID SLR regulations.
Reducing bank capital requirements, including extending the temporary exclusion of the US Treasury securities and deposits at Federal Reserve Banks from the SLR, would risk the “safety and soundness” of the nation’s financial system, Waters wrote in her letter to regulators.
Not only will the SLR exemption lapse as intended, but changes may be necessary due to recent growth in the supply of central bank reserves and the issuance of treasury securities, the federal banking regulator says, and 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”.
To ensure that the SLR, established in 2014, remains effective in an environment of higher reserves, the regulator says it will soon be inviting public comment on several potential modifications. “The proposal and comments will contribute to ongoing discussions with the Department of the Treasury and other regulators on future work to ensure the resiliency of the Treasury market,” the FSB says in a statement.
The decision chimes with Waters’ concerns that the uncertainty of the months ahead mean “it is crucial that regulators remain vigilant”, and oblige the largest banks to maintain loss-absorbing capital to guard against risks. She cites research that demonstrates an increase in capital is associated with an increase in loan growth. “Well-capitalised banks can serve as a source of strength for the economy in good times and bad,” Waters says.
The SLR suspension that came into effect in April last year meant that global systemically important banks (G-SIBs) reduced their tier-one capital requirements by approximately $72 billion.
The FRB now says it will take appropriate actions to assure that any changes to the SLR do not erode the overall strength of bank capital requirements.
