US Treasury Secretary Bessent: Removing SLR in the past had a substantial yield effect.

US Treasury Secretary Bessent: Removing SLR in the past had a substantial yield effect.

US Treasury Secretary Scott Bessent's recent remarks have reignited discussions about the potential impact of removing the supplementary leverage ratio (SLR) on financial markets. The SLR, a key component of post-crisis regulatory reforms, has been a subject of debate, particularly in light of its potential effect on Treasury yields.

In a recent interview, Bessent acknowledged that removing the SLR could have substantial implications for financial markets. The SLR, which is designed to ensure banks hold sufficient capital to withstand potential losses, has been a contentious issue. Critics argue that it imposes unnecessary constraints on banks, potentially hindering economic growth. Proponents, however, maintain that it is essential for maintaining financial stability.

Bessent's comments come at a time when the US fiscal policy landscape is shifting. The One Big Beautiful Bill Act (BBB), which promises sweeping tax cuts, budget cuts, and spending increases, has heightened concerns about the sustainability of US debt. The bill, which has cleared its first legislative hurdle in the House of Representatives, is now under review by the Senate. The key question for markets is the degree to which the BBB will affect the US deficit and the overall debt level [4].

The potential removal of the SLR could exacerbate these concerns. Historically, the removal of regulatory constraints has been associated with increased borrowing costs. For instance, the removal of the SLR in the past has been linked to significant yield effects [1]. If investors become alarmed by the impact of the BBB on the budget deficit and overall debt level, they may demand higher yields to compensate for the increased risk, potentially choking growth and markets.

However, it is crucial to note that the impact of removing the SLR is not solely dependent on fiscal policy. Other factors, such as the state of the economy and the Federal Reserve's monetary policy, will also play a significant role. The Federal Reserve, under Jerome Powell, has held interest rates steady in 2025, arguing for a patient approach to policy amid economic uncertainty caused by Trump's expanded and evolving use of tariffs [2].

Moreover, the Federal Reserve's independence from political meddling is a key concern. Whoever the Senate confirms for the post will have to prove that the Fed's independence remains intact. Trump has previously expressed his desire for a Fed chair who would lower interest rates, raising questions about the next pick's independence [2].

In conclusion, while the potential removal of the SLR could have significant implications for financial markets, it is essential to consider the broader context of US fiscal policy and the Federal Reserve's role. As the BBB makes its way through the Senate, investors and financial professionals will be closely watching the developments, seeking clarity on how these changes will impact the economy and markets.

References:

[1] https://www.forexlive.com/news/us-treasury-secretary-bessent-says-trade-talks-with-china-will-continue-20250610/
[2] https://www.straitstimes.com/business/economy/us-treasurys-bessent-emerges-as-possible-contender-to-succeed-feds-powell-bloomberg-reports
[3] https://www.theage.com.au/business/markets/trump-s-treasury-secretary-emerges-as-contender-to-run-the-fed-20250611-p5m6g5.html
[4] https://www.pictet.com/us/en/insights/monthly-house-view-june-2025

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