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Supplementary Leverage Ratio (SLR) Debate

US TSYS
Another day closer to the Supplementary leverage ratio (SLR) exemption expiration Wednesday, March 31 and still no word from the Fed gov's on decision over extending (widely expected) or letting it expire -- necessitating banks to scale back their deposits, reserves, and Tsy holdings.
  • TD Securities estimates a 60% of a temporary extension that could last several months, 25% chance of a "permanent extension" and only 15% the exemption will expire.
  • Expiration repercussions: tighter (read more negative) swap spreads as banks that have been the largest private underwriters of Tsys debt issuance during the pandemic are forced to unwind. Tighter balance sheet constraints, would "push repo rates higher. We are also concerned about market functioning around stress events such as Treasury auctions, as SLR creates frictions for dealer intermediation," TD wrote.
  • TD also "expect money market rates to remain low amid heavy reserves growth and a decline in bill supply. We remain mindful of trends in bill issuance given the passage of the stimulus package."
  • Credit Suisse Zoltan Pozsar weighs in suggesting an exemption of reserves and Tsys and is no panacea for globally systemic important banks (GSIBs) where their surcharge would still come into play.
  • Citing JP Morgan's GSIB score of 815 on Dec 31, 2020, the "bank's CET1 target and G-SIB surcharge effectively operate as an 'asset-cap' for the bank, which the permanent exemption of reserves and Treasuries from the SLR will not solve: even if there is an SLR exemption, the bank won't be able to increase assets." Zoltan concludes while it would make share buybacks easier for banks, SLR exemption/extension would not help alleviate balance sheet constraints.
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