A New Look at the Supplementary Leverage Ratio

On April 1, 2020, amid the pandemic slowdown and deteriorating liquidity conditions in the U.S. Treasury securities market, the Federal Reserve Board changed a then two-year-old capital requirement affecting the biggest bank holding companies. The Fed excluded Treasuries and reserve deposits from the 5% minimum supplementary leverage ratio (SLR) – a banking organization's Tier 1 capital relative to its total leverage exposure (TLE) – to stimulate credit and other business activity.

The suspension of the SLR rule lasted a year, but concerns persist about the resiliency, when under duress, of the all-important, $27 trillion Treasuries market, which relies heavily on the dealer functions of those large banking institutions. The International Swaps and Derivatives Association (ISDA), for one, advocates permanently excluding Treasuries from the SLR calculation, and it contends that the issue should be addressed in the context of the so-called Basel III Endgame as well as surcharges on global systemically important banks (G-SIBs).

Bankers and their lobbyists have warned that the Basel capital proposals, if not modified, will impede...