On June 25, the Federal Reserve is set to convene a crucial board meeting, the first under the regulatory leadership of Governor Michelle Bowman, to consider reforms to the Supplementary Leverage Ratio (SLR), a key capital requirement imposed on the nation’s largest banks.
With global debt/GDP over 3x, there is unlikely any solution that can address both liquidity and resilience issues effectively. No matter the outcome, the weight of excess debt is going to drive the financial system to a worse state
That’s for sure. It’s just that you could feel relatively safer knowing there are institutions willing to use their balance sheets to provide a backstop rather than watching the US Treasury market migrate further toward entities whose primary role is to intermediate order flows for a fee and increased leverage (hedge funds, PTFs, prime-brokers and so on). I think that’s really what the whole SLR debate is about. In my opinion at least.
It strikes me that if banks hold the debt, it is one step closer to nationalization. The system needs a cleansing. Perhaps having funds and brokers doing it and, importantly, allowing them to go bust would be a better outcome
I like how you think :-)) But this is also a matter of incentives. We’re living in a paradoxical banking environment. Liquidity ratios encourage banks to hold bonds on their balance sheets, but leverage ratios make it prohibitively expensive to actively trade them. So, banks load up on bonds and reserves because they qualify as high-quality liquid assets (HQLAs), yet they’re constrained from using them in repos and other transactions (because of SLR). Post-Basel III regulations ended up impacting the entire banking system and not for the better. One way or another, change is necessary here.
I guess the issue is there is no single solution that is going to address both issues. will regulators choose their poison specifically, or more likely try to find a middle ground which will not solve either issue. my money is on the latter.
With global debt/GDP over 3x, there is unlikely any solution that can address both liquidity and resilience issues effectively. No matter the outcome, the weight of excess debt is going to drive the financial system to a worse state
That’s for sure. It’s just that you could feel relatively safer knowing there are institutions willing to use their balance sheets to provide a backstop rather than watching the US Treasury market migrate further toward entities whose primary role is to intermediate order flows for a fee and increased leverage (hedge funds, PTFs, prime-brokers and so on). I think that’s really what the whole SLR debate is about. In my opinion at least.
It strikes me that if banks hold the debt, it is one step closer to nationalization. The system needs a cleansing. Perhaps having funds and brokers doing it and, importantly, allowing them to go bust would be a better outcome
I like how you think :-)) But this is also a matter of incentives. We’re living in a paradoxical banking environment. Liquidity ratios encourage banks to hold bonds on their balance sheets, but leverage ratios make it prohibitively expensive to actively trade them. So, banks load up on bonds and reserves because they qualify as high-quality liquid assets (HQLAs), yet they’re constrained from using them in repos and other transactions (because of SLR). Post-Basel III regulations ended up impacting the entire banking system and not for the better. One way or another, change is necessary here.
I guess the issue is there is no single solution that is going to address both issues. will regulators choose their poison specifically, or more likely try to find a middle ground which will not solve either issue. my money is on the latter.