Federal Reserve Chair Jerome Powell wants to see changes to a regulatory standard that many banks view as a binding constraint.
During testimony in front of the House Financial Services Committee on Wednesday, Powell said the Fed will likely explore
He said the move would be made with an eye toward improving the function of the Treasuries market, noting that the current rule disincentivizes banks to hold U.S.debt instruments.
"I have, for a long time, like others, been somewhat concerned about the levels of liquidity in the Treasury market. The amount of Treasuries is growing much faster than the intermediation capacity has grown, and one obvious thing to do is to reduce the effective supplemental leverage ratio," Powell said. "So, that's something I do expect we will return to and work on with our new colleagues at the other [bank regulatory] agencies, and get done."
Powell's comments came during his second day of testimony on Capitol Hill this week as part of his semi-annual report to Congress on monetary policy. He
The supplemental leverage ratio, or SLR, is calculated by dividing a bank's Tier 1 equity capital by its balance sheet assets and certain other exposures. Because Treasuries are included in this calculation, they increase the amount of capital a bank must hold, despite being essentially risk-free. The largest, global systemically important banks are subject to an additional 2% capital charge under the enhanced supplemental leverage ratio, or eSLR, framework.
At the height of the COVID-19 pandemic, the Fed implemented a temporary rule
While there was talk of
"It's time to move on the eSLR," he said. "We proposed doing so several years ago, we just didn't follow through on it. So I do think it's time."
The SLR rule was rolled out in 2014 as part of the broad-based regulatory reforms implemented in the wake of the global financial crisis. But, the federal debt has roughly doubled since then, with the market value of marketable Treasuries rising from $13 trillion to $26 trillion, according to Fed data.
"The quantity of Treasuries has grown really significantly, and the capital allocated to intermediating trades and Treasuries has not. In fact, it has shrunk," Powell said. "We need a liquid Treasury market, and this is one of the things that we can and should do, is to … reduce the calibration of that (SLR) measure."
Along with holding Treasuries directly, some banks also play a key market making role through their broker dealer affiliates.
Reforming the SLR was not the only regulatory change Powell previewed during his testimony in front of the House Financial Services Committee. He also reaffirmed his commitment to finalizing the so-called Basel III endgame capital reform in a way that is capital neutral.
"It's a good idea for us, for the United States, to finish Basel III in a way that's, you know, in keeping with Basel and also with what other jurisdictions are doing, comparable jurisdictions," Powell said.
But, Powell also reaffirmed his commitment to
Republicans on the committee were critical of Barr during Wednesday's hearing. Committee Chair French Hill, R-Ark., accused the Fed board of being "too deferential" to the vice chair for supervision on regulatory initiatives.
Powell did not comment on Barr's policies or the dynamic between him and the board. But, when asked whether the vice chair for supervision position was a useful one for the Fed, Powell suggested that it might create more problems than it solves, noting that before the creation of the position, the board handled supervision and regulation more effectively and with less volatility.
"You've got a group of seven people on the board, and there will be some, as appointments change … changes in the approach to regulation. But putting it all in a single person … can lead to some volatility in these things," Powell said, noting that it has resulted in "larger swings" in policies from one administration to the next. "That's not great for the institutions that we want to regulate. We want to have a good set of regulations that doesn't … swing back and forth very much."
The vice chair for supervision position was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, but the seat was not formally occupied until 2017, when President Donald Trump
Powell said the
"The way we look at it is, we're going to do our jobs, and I think there are a number of things that can be done that will be very constructive," he said. "If there is a new vice chair of supervision, I will welcome that person and do everything I can to make them successful."
