Wall Street Urges Treasury to Adjust SLR Rules Amid Market Volatility

Following the recent collapse of the U.S. Treasury market, there has been a growing call from Wall Street for the U.S. Treasury Department to adjust the Supplementary Leverage Ratio (SLR) rules. This comes after a significant drop in U.S. Treasury prices, which has raised concerns about liquidity and market stability.

Michael Faulkender, the U.S. Deputy Secretary of the Treasury, acknowledged that officials are discussing the applicability of the SLR to the $29 trillion U.S. Treasury market. This discussion follows widespread calls from market participants to reform the regulation, which is seen as a constraint on Treasury trading activities.

Faulkender, speaking at an event in Washington, stated, "We are studying this issue and having discussions about it." The SLR, which is calculated as a bank's Tier 1 capital (such as common equity) divided by all on- and off-balance-sheet assets, requires large banks to hold capital equal to at least 3% of their assets, and 5% for systemically important banks.

The SLR's calculation method treats all assets, including Treasuries and reserve currency, equally. This has been a point of contention, as it limits the ability of market makers to hold Treasury inventories during times of market stress, exacerbating supply-demand imbalances.

Several banking institutions have argued that the capital rule restricts their ability to increase Treasury holdings during periods of stress, as Treasuries are treated the same as riskier assets. Notably, the Federal Reserve temporarily suspended the SLR's application to Treasuries during the market turmoil of the COVID-19 pandemic but reinstated it afterward.

Faulkender raised the question, "Are we able to enhance the bond market's capacity to handle large transaction volumes if SLR imposes unnecessary constraints during periods of market volatility or stress?" However, he did not specify the parties involved in the discussion or provide a timeline for potential reforms.

Wall Street executives have been vocal about the need for regulatory changes. Jamie Dimon, CEO of JPMorgan Chase, predicted that without adjustments to capital and liquidity rules, the Federal Reserve would have to intervene in future Treasury market disruptions. Dimon suggested that modifying the SLR alone would not be sufficient for JPMorgan, but other bank executives believe that adjusting the rule would be beneficial.

David Solomon, CEO of Goldman Sachs, also advocated for changes to the SLR, stating, "Relaxing the SLR would benefit the Treasury market. This is an important structural reform." The recent volatility in the Treasury market has highlighted the need for improved liquidity and market stability.

Despite the recent rebound in Treasury prices, market participants remain cautious. Some analysts have expressed concerns about the fragility of the current market calm, noting that the overall image of U.S. assets, including the dollar and Treasuries, has been somewhat damaged in recent weeks.