Treasury Secretary Scott Bessent says US regulators are close to easing a key regulatory requirement for banks that the Trump administration hopes will inject more liquidity into the Treasury market, boost lending, and reduce upward pressure on long-term borrowing rates.
The move would mark a retreat from a key change made following the 2008 financial crisis when regulators imposed a series of new requirements designed to protect the banking system against future threats to its stability.
One of those requirements that Bessent wants to adjust was the so-called supplemental leverage ratio (SLR), a rule that requires big banks to maintain a preset buffer against their total portfolio of loans and debt. That pile includes large holdings of US Treasurys.
Bankers maintain that asking them to hold capital when they trade against their Treasury investments discourages them from acting as intermediaries in the financial markets, which can contribute to stress when markets become volatile.
US Treasury Secretary Scott Bessent. (Reuters/Nathan Howard/File Photo) ·Reuters / Reuters
The question of liquidity in the roughly $30 trillion market for US Treasurys has taken on new urgency following troubles in 2020 during the COVID-19 pandemic and a recent climb in long-term Treasury yields driven by growing concerns over the trajectory of US debt.
Some market watchers say investors’ confidence in US debt has been shaken by the nation’s fiscal challenges.
JPMorgan Chase (JPM) CEO Jamie Dimon on Friday said that a crack in the bond market is “going to happen.”
“I just don’t know if it’s going to be a crisis in six months or six years, and I’m hoping that we change both the trajectory of the debt and the ability of market makers to make markets,” Dimon said at the Reagan National Economic Forum.
“Unfortunately, it may be that we need that to wake us up.”
Banks are key buyers of US Treasurys and serve as broker-dealers in the Treasury market, helping other investors buy and trade the government bonds.
Bessent hopes a capital rule reset will allow banks to add more Treasurys to their balance sheet, thus giving the flood of supply a fresh incremental buyer. He also hopes that making things easier for banks will reduce upward pressure on long-term Treasury yields — another key goal for the new administration.
“The SLR can risk becoming a binding constraint, instead of a backstop,” Bessent said in a speech on March 6 before the Economic Club of New York. “The result is that the safest asset in the country, U.S. Treasuries, are not treated as such when the leverage restriction is applied.”
Bankers are making it clear they hope that this change happens.
Goldman Sachs Group (GS) CEO David Solomon last month called it “an important structural reform” that “would have a benefit to Treasury markets.”
Dimon of JPMorgan also agrees that amending the SLR would help the market in times of stress, though he noted that he also wants to see reforms across lots of capital requirements.
“The reason to change some of these things is so banks — the big market makers could intermediate more in the markets,” Dimon told analysts last month.
JPMorgan Chase CEO Jamie Dimon visits “Mornings with Maria” with Maria Bartiromo at Fox Business Network in April. (Noam Galai/Getty Images) ·Noam Galai via Getty Images
“If they do, spreads will come in, there’ll be more active traders,” Dimon said. “If they don’t, the Fed will have to intermediate, which I think is just a bad policy idea that every time there’s a kerfuffle in the markets, the Fed has to come in and intermediate.”
Banks and their lobbyists want changes to more than just SLR, arguing that the array of capital requirements makes it less profitable for banks to make business loans.
“Bankers are rightfully complaining to say, hey, you’ve made the capital requirements so stiff we can’t really afford to lend to businesses anymore — the cost of capital is too high for doing that,” Georgetown McDonough School of Business associate professor James Angel said.
Bessent may have an ally on SLR reform in Federal Reserve Chair Jerome Powell, who has said easing the rule for US banks could improve the functioning of the Treasury market.
“I have for a long time like others been somewhat concerned about the levels of liquidity in the Treasury market,” Powell said in February while testifying before House lawmakers.
“The amount of Treasurys has grown much faster than the intermediation capacity has grown,” Powell added. “And one obvious thing to do is to reduce the effective supplemental leverage ratio, the bindingness of it.”
Fed governor Michelle Bowman, who has been nominated to be the Fed’s top banking regulator, is another proponent of amending the SLR. Her nomination has passed out of the Senate Banking Committee but requires confirmation by the full Senate.
She noted in a speech last January that the SLR “can disrupt banks’ ability to engage in Treasury market intermediation,” which she said happened in the early days of market stress during the COVID-19 pandemic.
Federal Reserve Board governor Michelle Bowman, President Trump’s nominee to be Federal Reserve vice chair for supervision. (Reuters/Kevin Mohatt/File Photo) ·REUTERS / Reuters
In April 2020, the Fed had to temporarily step in and effectively lower the amount of capital banks needed to hold against Treasurys, freeing up their balance sheets to support the Treasury market and the economy during the crisis.
Reform of SLR, Bowman added, falls “in the category of ‘fixing what is broken.’ This is an issue that would be prudent to address before future stresses emerge that could disrupt market functioning.”
Some critics point out that there are risks in making it easier for banks to open more Treasurys, which do carry risk if rates suddenly move higher.
That’s what happened to Silicon Valley Bank in March 2023, as rising rates put pressure on a large portfolio of bonds. The lender eventually failed, creating a mini panic among banking system depositors.
Angel has his doubts that this could become a major problem, however.
“I have a lot of respect for Governor Bowman, and I think she’s probably right on this one,” he said. “I don’t think the SLR is going to be the seeds for the next crisis.”
