Fed signals SLR reform as way to bolster Treasury market intermediation

Federal Reserve Chair Jerome Powell told the House Financial Services Committee that the Fed supports reforms to the supplementary leverage ratio (SLR) and related leverage measures to reduce unintended constraints on bank intermediation in the Treasury market.

“When the leverage ratio is binding, it discourages banks from undertaking low margin, fairly safe activities such as intermediation in the Treasury markets,” Powell said. He added the Fed will publish a proposal for comment that “doesn't involve exclusion” in its primary option but also asks questions about possible exclusions for treasuries and reserves.

Committee members and Treasury officials have argued that SLR treatment of Treasuries and reserves limits banks’ capacity to intermediate in the market, increasing volatility and funding costs. Powell said the Fed temporarily excluded Treasuries from the SLR during the COVID emergency and that he supports a permanent, carefully sequenced reform to reduce the leverage‑ratio tax on such intermediation.

The chair also said the Fed will seek public comment and coordinate with prudential counterparts. He described the approach as a move to make the leverage ratio a backstop rather than the binding constraint, which he said would encourage more market‑making and liquidity in U.S. Treasury trading.

Members of the committee pressed Powell about whether netting for derivatives referencing Treasuries and other technical rule changes would be examined; Powell said he was “certainly open” to those conversations and pointed the committee to Vice Chair for Supervision Mickey Bowman as the lead on sequencing and supervisory details.

Powell said the Fed expects to issue a notice of proposed rulemaking and encouraged public comment; several members said they would welcome prompt action to improve market functioning.