Banking sector says easing of US leverage rules could support Treasury market
- US regulators will soon change how much capital banks must set aside for safe investments.
- Such move to change the “Supplementary Leverage Ratio” might reduce the amount cash banks have to reserve, freeing them to more lending and participation in the US Treasury market.
- Treasury Secretary Scott Bessent told lawmakers last week, that a revamp was high priority. The bank industry has consistently argued that the SLR, which was established after GFC has been a binding constraint for them to even the safest bank lending activities.
- Fed Chairman Jerome Powell acknowledged the question whether the leverage requirements discourage banks from mediating the treasury market.
- Currently, all banks are required to hold 3% of their capital against their leverage exposure, which is their assets and other off-balance sheet items like deriv. Largest global banks are required to meet 2%p more ratio, what is known as “enhanced supplementary leverage ratio.”
- The temporary emergency relief plan during the pandemic was exempting Treasury Bonds and central bank deposits from the calculation of SLR.
- All these talks are linked to the aggressive sell-off that happened in the Treasury market on April, sending US borrowing costs higher.
What is Basel III Endgame(B3E)?
- The rules apply to banks with over $100 billion in assets, would overhaul the way the biggest banks manage their capital, with knock-on implications for their lending and trading activities.
- Agreed after the GFC, it includes numerous capital, leverage and liquidity requirements
- The changes would result in higher capital requirements for banks with large trading operations.Banks being banned from using internal models to measure risks
- Banks argue they are well-capitalized, having withstood the COVID-19 pandemic and regularly clearing the Fed's annual stress tests, and any capital hikes are unjustified.
What is GSIB Surcharge?
- Global Systematically Important Bank surcharge is a capital buffer by the largest banks, over and above their risk-based capital requirements and other buffers.
- The amount of additional capital required depends on several factors such as risk, size, complexity and reliance on short-term wholesale funding. Because U.S. GSIBs make 45% of all bank loans to businesses and households in the Unites States, this surcharge has real economic impact on lending.
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DXY: 100.16
US Treasury 30Y yield: 5.024%
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KTB 2Y yield: 2.367%
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