Federal Reserve Proposal Frees $185 Billion for Banks Boosting Treasury Market Liquidity

The Federal Reserve has announced a proposal to ease the enhanced Supplementary Leverage Ratio (SLR) requirement for major U.S. banks, including JPMorgan Chase and Bank of America. This move is expected to release approximately $185 billion in capital for these institutions. The easing of the SLR requirement is aimed at boosting liquidity in the U.S. Treasury market, which has been a focus of regulatory attention in recent years.

Market analysts have suggested that the proposed changes could free up significant capital for banks, potentially enhancing liquidity in various financial markets, including Treasuries. The proposal, led by Fed officials including Michelle Bowman and Jerome Powell, seeks to reform capital rules that have been deemed "distorted" by Bowman. This reform is seen as a long-overdue adjustment to the existing regulatory framework.

Involved banks such as JPMorgan Chase, Goldman Sachs, and others could receive a capital windfall of about $185 billion. Jerome Powell, Chairman of the Federal Reserve, emphasized that the current leverage ratio requirements create perverse incentives that undermine the stability of vital markets like U.S. Treasuries. He stated, "When the leverage ratio becomes the primary constraint, rather than risk-based measures, it creates perverse incentives that actually undermine the stability of vital markets like U.S. Treasuries."

Following the announcement, bank stocks saw an immediate rise of 1–1.6%, with the S&P 500 Banks Index up 1.4%, boosting overall market sentiment. Experts believe that the easing of the SLR requirement could indirectly affect high-cap cryptocurrencies by improving broader market liquidity. The proposal might enhance banks' roles in the Treasury market, indirectly influencing interest in digital assets. While the proposal is targeted toward traditional banks, the potential liquidity expansions could have secondary effects on cryptocurrencies like BTC and ETH.

The Fed's action reflects historic patterns seen post-2008, aimed at stabilizing markets. Past SLR adjustments often led to banks increasing capital allocations in government securities. Analysts believe that further capital proposals during Bowman’s leadership might follow, shaping broader financial dynamics. While the direct impact on cryptocurrencies is unclear, the proposal’s secondary effects could stimulate market interest in digital assets.