tl;dr
The US government is preparing to announce a rollback of banking regulations by reducing the supplementary leverage ratio (SLR) for US banks' capital reserves. The SLR, implemented under Basel III in 2014 to prevent a financial crisis, requires systemically important banks to maintain a 5% SLR at th...
The US government plans to reduce supplementary leverage ratio (SLR) requirements for banks to ease capital reserve rules and align with international standards, sparking debate over financial stability versus market liquidity.
Implemented under Basel III in 2014 to prevent a financial crisis, the current SLR requires systemically important banks to maintain 5% at the holding company level and 6% at the insured depository institution level. The proposed rollback aims to bring these figures closer to international standards, which range from 3% to around 4.25% in other developed countries.
Advocates like Greg Baer, head of the Bank Policy Institute, argue that high SLR requirements penalize banks for holding low-risk assets such as Treasuries, thereby restricting market liquidity during times of stress when support is critical. Federal Reserve Chair Jerome Powell also supports reducing the SLR to better support the US Treasury market and improve market structure.
However, critics such as Nicolas Véron, senior fellow at the Peterson Institute for International Economics, warn that relaxing capital standards amid current economic risks and the dollar’s international role could undermine financial stability. They stress that now may not be the prudent time for such regulatory easing.
This discussion highlights the tension between maintaining robust capital buffers to safeguard the banking system and enabling sufficient market liquidity to prevent market disruptions—particularly during economic stress. The exact new SLR target percentage remains undisclosed, but any reduction would represent a significant regulatory shift with far-reaching implications for US banks and the broader financial system.