Alphabet Soup: SLR

Will relaxing bank capital rules help the Treasury market?

Alphabet Soup: SLR

This month’s acronym is SLR—short for Supplementary Leverage Ratio—and it’s timely. U.S. bank regulators just agreed to ease this requirement, hoping it will support the market for U.S. Treasuries and free up bank capital for other uses.

I’m often asked whether relaxing the SLR would help Treasury market liquidity. I’ll get to that. But first, let’s level set.

What Is the SLR?

The SLR was introduced in 2013 (fully phased in by 2018) as part of the post–Great Financial Crisis (GFC) reforms. It’s a non-risk-based capital backstop, meant to complement the more complex risk-weighted capital requirements. Why? Because regulators believed that large banks could use highly complex internal models to understate their risk—and their capital needs.

The SLR was supposed to be the simple check: take a bank’s total exposures, regardless of risk, and require it to hold a flat percentage of top-tier capital against them.

That simplicity is also its flaw.

Imagine forcing a bank to hold the same amount of capital against a Treasury bill as it does against a 10-year unsecured loan to a meme-coin issuer in the Central African Republic (yes, that meme coin exists—look it up). That’s like charging the same life insurance premium to a healthy 10-year-old and an immunocompromised 98-year-old.

The Practical Effects

Banks don’t like to hold Treasuries under this regime. Why? Treasuries barely pay anything, but they still carry the same SLR “insurance fee” as riskier assets that throw off much bigger returns. As a result, banks naturally shift away from holding government debt.

And during moments of crisis—think March 2020—banks hit their SLR limits just when the market needs them most. That’s when we need market makers of last resort, and they can’t show up.

How Much Capital Are We Talking?

• The current baseline SLR is 3%, applicable to U.S. bank holding companies with over $250 billion in assets and their insured subsidiaries.

• For the largest, systemically important banks, an enhanced SLR (eSLR) was introduced in 2014:

  • 5% at the holding company level

  • 6% at the insured depository institution level

Those are hefty requirements, especially when applied indiscriminately across asset types.

What’s Changing?

The Fed, OCC, and FDIC just approved a rule lowering the eSLR range to 3.5%–4.25%, tied to each bank’s systemic risk score. It’s a more tailored approach, but still a leverage constraint.

Will This Help the Treasury Market?