WASHINGTON – The Federal Reserve said Friday that it would let the one-year reprieve for big banks to clear ultra-secure assets such as Treasury securities expire at the end of the month as scheduled, a loss for Wall Street firms that have been pushing for an extension of the bailout.

This decision means that banks lose the temporary possibility to exempt government bonds and deposits held at the central bank from the so-called supplementary leverage ratio for creditors. This ratio measures the amount of capital banks raise from investors, earn from profits and use to absorb losses – as a percentage of loans and other assets. Without exception, treasury bills and deposits are considered assets.

The Fed has announced that it will soon propose longer-term rule changes to address ultra-secure assets.

Given the recent increase in the supply of central bank reserves and the issuance of Treasury bonds, the Board may need to review the current design and calibration of the SLR over time to avoid creating tensions that could both stifle economic growth and undermine financial stability, the Fed said in a statement.

The Fed emphasized that the overall capital requirements for large banks will not decline.

Federal Reserve Chairman Jerome Powell told Nick Timiraos that there are no plans to raise interest rates until labor market conditions peak and inflation remains at 2%. (First published on 4/3/2021) Photo: Eric Baradat/Agence France-Presse/Getty Images.

The Federal Reserve instituted a temporary waiver a year ago to boost the flow of credit to tight consumers and businesses and ease tensions in the Treasury market that arose when the coronavirus hit the U.S. economy. Since then the market has stabilised.

Banks and their industry associations have lobbied for an extension of the exemption, believing that without it, banks could pull back significantly from buying government bonds, adding to the upward pressure on bond yields that has shaken markets in recent weeks.

They warned that, without help, some companies could be on the verge of exceeding capital requirements in the coming months. To avoid this, they could be forced to buy fewer Treasury bonds or get rid of customer deposits, the banks said.

That would give banks a less important role as a middleman in the Treasury market or as holders of fewer deposits that they use to buy Treasury securities or build up Fed reserves – just as Congress has approved a $1.9 trillion bailout package that could push another $400 billion in stimulus payments into deposit accounts and lead to more borrowing by the federal government, analysts say.

Leading Democrats, such as Senate President Sherrod Brown of Ohio and Senator Elizabeth Warren of Massachusetts, said before the Fed’s decision that extending the bailout would be a big mistake and would weaken the post-crisis regulatory system.

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Opposition in Congress to looser banking rules is strong, writes

Roberto Perli

and Benson Durham of Cornerstone Macro, an investment research firm, before the Fed’s announcement.

Large U.S. banks must maintain capital of at least 3% of their total assets, including loans, investments and real estate. By imposing a minimum ratio on banks, regulators effectively prevent them from lending too much without increasing their capital.

The banks have huge reserves of cash, US Treasury bonds and other safe assets. In refining the ratio calculation last year, the Fed did try to arrange a swap. If government bonds and central bank deposits are removed from the calculation, banks should be able to replace them in the asset pool with loans to consumers and businesses.

It is not known if this has happened. According to a study by the Institute for Research on Public Policy (IRPP), lenders in the US expanded their loan portfolios by about 3.5% last year, the slowest pace in seven years.


With data from the Federal Deposit Insurance Corporation.

Corrections and additions
The Federal Reserve provided temporary capital support to large banks for one year. An earlier version of this article erroneously stated that the discharge is annual. (Set on March 19)

Email Andrew Ackerman at [email protected].

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