Powell: Fed will revisit supplemental leverage ratio to bolster Treasury market liquidity
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Summary
House members and Federal Reserve Chair Jerome Powell agreed the supplemental leverage ratio (SLR) and its enhanced calibration have reduced banks' capacity to intermediate U.S. Treasury markets; Powell said the Fed expects to revisit the SLR and related rules to improve market functioning.
At the House Financial Services hearing, members warned that rising Treasury issuance and reduced intermediation capacity have weakened Treasury market liquidity, and they urged the Fed to revisit capital and leverage rules that discourage banks from holding and trading treasuries.
Powell acknowledged the imbalance: “The amount of treasuries has grown much faster than the intermediation capacity has grown,” and said he expects the Fed to “return to and work on” the supplemental leverage ratio. He described reducing the bindingness of the SLR calibration as an “obvious thing to do” to help the Treasury market.
Why it matters: A liquid Treasury market underpins government financing and the broader financial system. Committee members said foreign banks and nonbanks have filled roles once occupied by U.S. banks, raising resilience and competitiveness concerns.
Key exchange and context
- Problem described: Members pointed to rapid growth in Treasuries outstanding versus a decline in market‑making capacity at banks, creating a misalignment that raises term premiums and can require frequent central‑bank intervention.
- Fed response: Powell said the Fed proposed adjustments previously and that it is time to revisit the ESLR/SLR calibration and coordinate with other agencies.
Ending: Powell committed to working with the other banking agencies on adjustments intended to increase banks’ capacity to intermediate Treasury markets and improve liquidity.