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US regulators are planning to ease the supplementary leverage ratio (SLR) rule, which limits how much banks can hold in Treasury securities. This aims to increase liquidity in the $29 trillion Treasury market and lower government borrowing costs.
The SLR was introduced post-2008 crisis, requiring banks to have a set amount of capital against their total leverage exposure, including Treasuries. The proposed adjustment would exclude Treasuries and central bank deposits from the SLR calculation, enabling banks to hold more of these assets without affecting their capital requirements.
Review of Esrl for Major Banks
US regulators, including the Federal Reserve and the FDIC, are reviewing changes to the enhanced supplementary leverage ratio (eSLR) for major US banks. Under the proposal, the capital requirement for bank holding companies could decrease to 3.5%-4.5% from the current 5%. Operating subsidiaries of the banks could also see a drop in their requirements to the same range, compared to the present 6%. Sources discussing these potential changes remain unnamed due to the non-public discussions.
This article explains a planned set of adjustments by American regulators that would make it easier and less costly for large banks to hold government debt. At the heart of the matter is a capital rule known as the supplementary leverage ratio (SLR), which determines how much capital banks must retain relative to their total assets, including those considered low-risk, such as US Treasuries. After the 2008 financial crisis, the requirement was applied to reduce risk in the financial system by forcing banks to maintain strong balance sheets. However, that approach also introduced side effects—particularly reducing some banks’ appetite for holding Treasury securities, as doing so increased their leverage exposure and, by extension, their capital costs.
Now, regulators are considering softening this rule by adjusting what’s called the enhanced SLR, which applies specifically to the largest institutions. Treasury securities and deposits held at the central bank would be removed from the formula that determines the ratio. In effect, banks would have more room to purchase and hold government bonds without increasing the capital they’re required to keep on hand. That would, in theory, encourage participation in Treasury markets, which have experienced periods of declining liquidity in recent years.
By trimming the capital ratio to a band between 3.5% and 4.5%—down from the current 5%—holding companies would face a noticeably lighter requirement. Their operating arms would also be allowed to reduce the ratio from 6%, helping them better match their capital loads with the actual risk those assets represent. This could allow dealers to carry larger inventories of Treasuries, which is especially timely given the growing size of the Treasury market, currently estimated around $29 trillion and continuing to expand due to sustained federal deficits.
Impact on Fixed Income Derivatives
For those of us dealing in fixed income derivatives, such shifts have knock-on effects that do not lie at the margin. When primary dealers gain greater capacity to absorb more government bonds, liquidity conditions improve, benchmark yields may moderate, and hedging costs can adjust accordingly. The emphasis here is how balance sheet flexibility at the dealer level transmits into pricing across rates markets, with Treasury basis, repo spreads, and swap curves all downstream of these dynamics.
While the easing has not yet been finalised, the direction is clear. The regulatory mood appears to support stronger intermediation in Treasuries, which in turn could drive tighter bid-offer spreads, smoother hedging execution, and larger volumes clearing more easily through the system. In anticipating how market-makers respond, we prepare for a widened balance sheet footprint and sharper competitive pricing in the cash bond market and its associated derivatives.
The effect of pullback from the previous stricter SLR setup is not just technical; it rewires incentives for bank treasuries and risk desks. With constraints lowered, risk-weighted return thresholds shift, and positions that were once economically unviable at scale may now be reconsidered. Liquidity returns not just in depth but in resilience, particularly during volatile periods when capital headroom becomes critical.
From where we stand, the calculus around trade structuring changes, especially those involving leverage or balance sheet consumption. Compression trades, roll strategies, and term funding arbitrage start to carry different payout structures as bank desks recalibrate pricing tiers based on this incipient framework. The net effect is that curves may steepen modestly if dealer capacity rises rapidly, or flatten near-term if new bond supply finds ample balance sheet to soak it up.
Yellen’s department will be keenly aware of this interplay—not in strategy, but in outcome—as it ties directly to how financing rates for the government shift over time. Yet for us, the response must rest in recognising where volumes are poised to swell and which instruments will reprice as balance sheet bottlenecks begin to ease. Whether in Treasury forwards or volatility-sensitive positions, the baseline assumption around constraints just nudged materially. That’s not theory. It builds directly into execution costs, margin frameworks, and risk transfers over the coming quarter.
