Millions of Americans, Not Just Big Banks, Will Benefit from Reforming the SLR

A recent opinion article from the Bloomberg Editorial Board writes that changes to the enhanced supplementary leverage ratio (eSLR) would leave banks less resilient when unrealized losses occur on long-term Treasuries.

However, the editors are taking a narrow view of the proposed reform to the eSLR. Millions of American investors, not just big bank parents, will benefit from the proposal. The benefits deserve equal weighting along with any potential costs.

ICI represents 120 million long-term individual investors saving for their future using mutual funds and exchange-traded funds. We have long been concerned that inappropriate or too high capital standards have degraded market-making and thus market liquidity. Revising the eSLR will help ease stresses in the US Treasury market during times of market uncertainty.

In a crisis such as March 2020, sell orders for US Treasuries can outpace buy orders. For bank-affiliated dealers, the eSLR limits their capacity to intermediate Treasuries precisely when it is most needed. This is why the Federal Reserve Board temporarily loosened the SLR during the first year of the coronavirus pandemic. The eSLR proposal helps to reduce the risk of a liquidity crisis, which is a potent way to avoid financial instability.

ICI agrees that banks should be well-capitalized—but over the past decade regulators have lost sight of how costly capital is. The funds we represent rely on market-making, which requires bank capital. Expanding banks’ ability to make markets is good for American investors.

Concerns around interest rate risk can be mitigated by tighter risk management and better regulatory oversight. The editors cite the collapse of Silicon Valley Bank (SVB) in March 2023 as a reason not to reform the eSLR, but this falls short. The SLR was back at its original parameters nearly two years before SVB failed, meaning the more restrictive SLR did not prevent SVB from holding long-term Treasury and agency securities that lost value when interest rates rose. Their risk management practices simply did not recognize the interest rate risk.

The US Treasury market has been historically the deepest and most liquid market in the world. But cracks in its resiliency have been showing for some time. The proposal to relax eSLR requirements would be a positive step towards alleviating pressures in the Treasury market. That’s good for millions of US investors.