MNI POLICY: Fed To Let SLR Exemption Expire As Scheduled

The Federal Reserve said Friday it would allow a temporary rule easing banks' supplementary leverage ratios to expire as scheduled on March 31 while launching a public comment process on more permanent changes to the SLR at a time of unprecedented expansion of reserves from QE.

Fed officials said in a call with reporters that they were confident that the move will not have an adverse effect on Treasuries trading by impairing liquidity or functionality.

The eight U.S. globally systemically important banks currently have close to a trillion dollars of Tier I capital, with an aggregate SLR of 6.2%. That amounts to a buffer of USD200 billion of excess capital over the SLR, which officials deemed to be substantial.

However, as the supply of bank reserves and the issuance of Treasury securities have grown sharply in recent years, "the Board may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability," the Fed said.

"The Board will take appropriate actions to assure that any changes to the SLR do not erode the overall strength of bank capital requirements," it said.

The Fed plans to seek comments very soon on a variety of options on how to reform the SLR, the officials said, without offering additional details.

RESERVES GROWTH

Reserves now stand north of USD3.5 trillion and headed higher. At the time the SLR was put into place in 2014, reserves were around USD1.3 trillion. That means the leverage requirements are no longer a backstop as they were intended to be.

The U.S. central bank faced strong objections from Democratic lawmakers that the SLR exemption weakens the post-crisis financial stability framework.

There was broad support among governors for allowing the temporary change to expire, the officials said.