At Any Rate US Rates: SLR reform: Helpful, but not a panacea
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May 21, 2025 Ipek Ozil and Teresa Ho dive into the complexities of proposed supplementary leverage ratio reforms. They discuss the urgent need for these reforms after the pandemic and predict different potential outcomes. The implications for dealer holdings and risk management in the treasury market are explored. Additionally, they analyze the effects on swap spreads and bank capital allocation, revealing that while some improvements may occur, significant challenges in market liquidity and funding conditions are likely to persist.
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SLR Reform Process Complexity
- SLR reform is a complex interagency process involving the Fed, OCC, and FDIC.
- Confirmation of key personnel is required before the regulatory process can begin in earnest.
Pandemic SLR Relief Was Temporary
- Temporary SLR relief during the pandemic was fast but context-specific to crisis liquidity support.
- Any permanent SLR reform will follow the usual slower regulatory process, not a quick fix.
Selective Treasury Exemptions Likely
- Excluding all bank portfolio treasuries from SLR is unlikely due to risks revealed by Silicon Valley Bank's failure.
- Dealer treasury holdings are better candidates for exemption to support market liquidity without undue risk.