There is an active debate in the U.S. about easing or reforming the SLR.
Let’s dive into what the SLR actually is—and then uncover how tweaks to this key regulation can ripple through financial markets, shaking up equity prices and shifting the broader economic landscape.
What is SLR?
The SLR, or Supplementary Leverage Ratio, is a key regulatory measure in U.S. finance that requires large banks to maintain a minimum level of high-quality capital relative to their total leverage exposure, regardless of the riskiness of the assets held.
Launched in 2014 as a cornerstone of the Basel III reforms, the SLR was crafted in direct response to the hard lessons of the 2007–2009 financial crisis—a period when unchecked leverage, especially from hidden off-balance-sheet risks, shook the foundations of the global financial system and exposed just how vulnerable banks could be when oversight fell short.
SLR is a rule for big banks in the US. It simply says that banks must always keep a certain amount of their own money (called capital) compared to everything they owe and own—even if those things seem very safe.
This rule helps make sure banks don’t borrow too much or take on too many risks. It’s like a safety cushion, so if something goes wrong, the bank has enough money to handle it and protect its customers.
SLR is a way to make sure big banks don’t get in over their heads by requiring them to keep a minimum amount of safe money compared to all their activities.
SLR and US Treasury Market
How Does the SLR Shape the Pulse of the Treasury Market?
The SLR rule is closely tied to the U.S. Treasury market because it affects how much U.S. government debt banks can buy, hold, and trade. Under the SLR, banks must hold a set amount of capital against all assets—including safe ones like U.S. Treasuries—without considering their risk level. This means that when banks buy more Treasuries, their SLR goes down, and they may hit regulatory limits that force them to slow or stop buying, even if Treasuries are considered very safe.
When SLR rules are tight, banks can’t buy or trade as many Treasuries, which means there’s less buying and selling in the market and it can become harder to trade, especially when things get stressful.
In March 2020, as the COVID-19 crisis shook financial markets, the Federal Reserve gave banks a temporary break by letting them leave Treasuries out of their SLR calculations. This move opened the door for banks to step up their buying and trading of Treasuries, helping to calm the market and boost liquidity when it was needed most.
Will New Rules Unleash Banks and Revitalize the Treasury Market?
Top officials, including Treasury Secretary Scott Bessent and Federal Reserve Chair Jerome Powell, have signaled that SLR reform is a high priority and could happen as soon as this summer.
Tweaking the SLR could send ripples across Wall Street and beyond. If regulators ease the rule, banks would have to set aside less capital for holding safe assets like Treasuries, freeing up billions for more lending, trading, and market-making. This extra flexibility could boost liquidity in the massive $29 trillion Treasury market, making it easier to buy and sell bonds—even during periods of stress.
SLR reform could energize financial markets by giving banks more room to operate—but it also raises important questions about balancing growth with safety.
Here’s a quick rundown of the advantages that come with easing the SLR rule:
More Lending Power: Banks would need to hold less capital against safe assets like Treasuries, freeing up cash they can use to make more loans to businesses and consumers.
Greater Treasury Market Liquidity: Banks could buy and trade more Treasuries, making it easier for investors to buy or sell these bonds and helping the Treasury market run more smoothly, especially during times of stress.
Stronger Market-Making Role: Helping to keep prices stable and reducing sharp swings in yields.
Lower Borrowing Costs: Improved liquidity and stability in the Treasury market could help keep U.S. government borrowing costs down, which benefits taxpayers and the broader economy.
Support for Economic Growth: By easing capital constraints, banks would have more flexibility to support businesses and consumers, potentially boosting economic activity.
Flexibility During Crises: As seen during the COVID-19 pandemic, when temporary relief helped restore stability to the Treasury market.
Could Looser Bank Rules Spark a Rally in the Stock Market?
Easing capital requirements would unlock extra cash for banks, giving them the green light to ramp up lending and dive deeper into trading—including in the stock market. With banks more active, you could see a surge in market energy and smoother trading, as liquidity gets a much-needed boost.
If risk management takes a back seat, equity markets could turn into a rollercoaster ride, with sharper swings and unpredictable moves becoming the new normal.
The reform could act as a spark plug for economic growth, setting off a chain reaction where a healthier economy fuels bigger corporate profits—often a recipe for rising stock markets and investor optimism.
Navigating the Path Ahead:
Challenges or Clear Skies for SLR Reform?
While SLR reform could boost liquidity and market activity, it also raises concerns about increased risk-taking, weaker financial safeguards, and potential instability in the banking system during periods of market stress.
Here’s a snapshot of the main challenges that could arise from relaxing the SLR rule:
Banks Might Take More Risks: If banks don’t have to keep as much money aside, they might lend or invest in riskier things, which could make the financial system less safe.
Less Protection for Banks: The SLR helps keep banks from borrowing too much. If it’s relaxed, banks could become too heavily borrowed and more vulnerable during tough times.
Market Imbalance: Banks might focus too much on safe assets like U.S. Treasuries and not enough on other types of loans or investments, which could create problems in the market.
Harder for Central Banks to Manage Money: The SLR helps central banks control how much money is flowing in the economy. Changing it might make their job harder, especially during financial crises.
Other Financial Firms Could Lose Out: If only banks get relief from the rules, other companies that don’t have the same benefits might struggle to compete.
More Market Ups and Downs: With fewer limits, banks might make bigger moves in the markets, which could cause more ups and downs in prices.
Hedge Funds and the SLR Shake-Up: Chasing Opportunity in a Shifting Treasury Market
SLR reform is having a major impact on hedge funds, especially those active in the U.S. rates and swap markets.
Relaxing the SLR regulation would directly impact the financing of Treasury cash-futures basis trades* by making it easier and cheaper for broker-dealers to provide repo funding to hedge funds and other market participants. When SLR constraints are loosened, banks and their dealer affiliates can expand their balance sheets and hold more Treasuries without facing higher capital charges.
SLR reform could supercharge basis trades by letting broker-dealers handle more Treasuries without extra restrictions, making it easier and cheaper to finance these deals. The result? A livelier Treasury market with more action and smoother trading for everyone involved.
When trading heats up and positions get bigger, markets can become a lot more unpredictable if the winds suddenly shift.
So, while there’s real upside, the risk of sudden shocks and instability is always lurking in the background—it’s a high-wire act between fueling growth and keeping the system steady.
*A Treasury cash-futures basis trade is a strategy that aims to profit from the price difference—called the "basis"—between a U.S. Treasury bond (the cash security) and its related Treasury futures contract. A trader buys a Treasury bond in the cash market and at the same time sells a futures contract on that bond.
The expectation is that the prices of the bond and the futures contract will move closer together (converge) as the futures contract approaches its expiration.
The trader finances the bond purchase using repo agreements, which means borrowing money with the bond as collateral.
The profit comes from the narrowing of the price gap between the cash bond and the futures contract, after accounting for financing costs and other fees.
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