United States: Will easing leverage requirements stimulate demand for Treasuries?

In the coming months, a relaxation of the Basel leverage ratio (Supplementary Leverage Ratio, SLR) could be proposed in the United States. The aim is to ease the balance sheet constraints on primary dealers, most of which are subsidiaries of large banks, and thereby improve intermediation conditions in the US Treasury market.

Ways to relax the SLR standard

Various options for easing the rules could be considered

A first option would be to reduce the enhanced SLR requirements (eSLR) specific to global systemically important banks (G-SIBs) and their deposit-taking subsidiaries (5% and 6% respectively) to the level of the Basel recommendation (i.e., 3% plus a buffer set at 50% of the method 1 G-SIB surcharge3). Under this assumption, the weighted average requirement for the eight US G-SIBs would be 3.86%. Given their Tier 1 capital stock in Q1 2025, this first option would allow them collectively to increase their exposure to risk-free assets by a maximum of around USD 6 trillion (Chart 1, representing an increase of nearly 30% of their overall exposure).

A second option would be to deduct reserves held with the Federal Reserve and US Treasuries from the SLR ratio denominator. On average, this exclusion would reduce the leverage exposure (ratio denominator) of the 20 banking groups subject to the SLR requirement by 13% and improve their SLR ratio by 100 basis points (Chart 2). As the outstanding amount of these risk-free assets would no longer have any effect on the SLR ratio, this option would in theory allow unlimited holdings.

A measure to support Treasury market stability

However, this relief alone should not encourage banks to buy Treasuries on a large scale. This could increase G-SIB capital surcharges (which are linked to balance sheet size), increase transformation and interest rate risks, conflict with their internal market risk exposure limits and profitability targets, or even weaken their liquidity position.

In our view, the challenge of this easing will not be so much to place the additional paper issued by the US Treasury on banks' balance sheets in order to compensate for investors' lack of appetite, but rather to strengthen this appetite by reassuring investors about banks' ability to play their role as intermediaries, particularly in the event of a shock.