The Federal Reserve will not extend temporary relief on a bank regulation known as the supplementary leverage ratio (SLR), it said on Friday, despite large efforts by banks to persuade the central bank to do so.
The SLR is a regulation that requires the largest U.S. banks to hold a minimum level of capital. Like many post-crisis measures, the SLR is broadly designed to ensure that banks are able to absorb any losses stemming from financial or economic shocks.
When the Fed originally announced the change in April 2020, it insisted that the measures were to protect liquidity conditions in the Treasury market. It also clarified that the measures would be temporary and expire on March 31, 2021.
“Since that time, the Treasury market has stabilized,” the Fed said in its statement Friday.
“The Board will take appropriate actions to assure that any changes to the SLR do not erode the overall strength of bank capital requirements,” the central bank said, adding that it would field recommendations on permanent changes to the SLR at a later date.
As the Fed aggressively ramped up its money printing to support the economy through the COVID-19 crisis, the Fed and two other banking regulators opted to loosen the calculation of the SLR. The concern: that the flood of liquidity would balloon U.S. government debt holdings in the banking industry.
Because of the way the SLR is calculated, a sharp increase in U.S. Treasuries could push banks to fall below their regulatory minimums.