Lawmakers press Fed on SLR reform as tool to improve Treasury market intermediation

Several members of the House Financial Services Committee used Chairman Powell's testimony to press the Federal Reserve on reforms to the supplementary leverage ratio (SLR) and related measures they say constrain banks' ability to intermediate in Treasury markets.

Lawmakers including the chair of the committee's housing and insurance subcommittee and the chair of the task force on monetary policy urged the Fed to finalize changes to avoid a repeat of last year's episodes of Treasury market stress and to lower the implicit capital penalty for low-risk activities such as Treasury intermediation.

Powell said he has "long favored leverage ratio reform" and that, historically, when the leverage ratio binds it discourages banks from holding low-return, low-risk assets. He told the committee the Fed will publish a proposal for comment; the forthcoming notice will outline a primary proposal (not including exclusion of treasuries from the calculation) while asking questions about possible alternatives including exclusion.

On the temporary SLR relief provided during the COVID emergency, Powell said that measure was emergency relief and that the board now intends a permanent, rule-based solution. He observed that excluding Treasuries from the SLR calculation during pandemic was helpful but was designed as temporary emergency support.

Members asked whether netting for Treasury derivatives and other technical changes should be considered. Powell said he is open to discussion and suggested the vice chair for supervision, who oversees these prudential topics, will lead sequencing and technical decisions.

Lawmakers framed the issue as one of market functioning and public interest, arguing that better bank intermediation in Treasury markets could lower yields and improve liquidity. Powell agreed more intermediation would matter for market functioning but did not provide quantitative estimates of yield effects.