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Home»Finance»Analysis-Trump’s focus on US yields fuels bets on bank leverage rule review
Finance

Analysis-Trump’s focus on US yields fuels bets on bank leverage rule review

February 15, 2025No Comments5 Mins Read
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Analysis-Trump's focus on US yields fuels bets on bank leverage rule review
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By Davide Barbuscia

NEW YORK (Reuters) – The Trump administration’s pledge to include long-term U.S. Treasury yields has strengthened bond market expectations {that a} long-desired regulatory shift on financial institution leverage necessities may very well be lastly looming.

Some merchants are betting regulators could quickly concentrate on a overview of the Supplementary Leverage Ratio (SLR), a rule requiring huge U.S. banks to carry an additional layer of loss-absorbing capital towards U.S. authorities debt and central financial institution deposits.

The attainable coverage change would imply banks wouldn’t have to put aside as a lot extra cash once they maintain secure belongings like Treasuries.

This might ultimately assist push U.S. Treasury yields decrease, some traders and analysts stated, by giving banks extra leeway to carry Treasuries and certain boosting demand.

The anticipation comes after U.S. Treasury Secretary Scott Bessent stated final week that President Donald Trump’s administration was centered on containing 10-year Treasury yields, a constructing block of worldwide monetary markets and a benchmark for customers’ borrowing prices.

The White Home and the Treasury Division didn’t instantly reply to requests for remark.

Ryan O’Malley, head of portfolio administration at Ducenta Squared Asset Administration, stated a possible overview of the SLR could be optimistic for the Treasury market and different debt belongings, which might profit from banks releasing up their stability sheets.

“It is going to enhance their demand for Treasuries and different belongings. It is going to additionally most likely strengthen banks’ credit score profile,” he stated.

The SLR was launched as a part of regulatory efforts following the 2008 international monetary disaster. Over time, nevertheless, many Treasury market members have come to see it as a significant impediment to banks offering liquidity to merchants, significantly at occasions of heightened volatility.

The Financial institution Coverage Institute (BPI), a commerce affiliation representing giant U.S. banks, stated in a latest paper {that a} recalibration of the ratio could be essential to preserving market functioning, significantly given the prospect of rising authorities debt issuance resulting from giant funds deficits.

“We predict adjustments to the SLR may very well be made comparatively rapidly,” Francisco Covas, government vice chairman and head of analysis at BPI, informed Reuters in an interview.

The SLR ought to be close to the highest of the checklist of capital priorities for U.S. regulators, Covas added, referring to the Federal Reserve, the Workplace of the Comptroller of the Forex, and the Federal Deposit Insurance coverage Company.

Spreads of swap charges over Treasury yields have widened in latest days, an indication that traders are beginning to anticipate a overview of the rule. Rate of interest swaps enable merchants to hedge rate of interest danger by exchanging a floating fee for a set fee, or vice versa.

Swap spreads, which have been deeply unfavorable over the previous few years, widened – or turn out to be much less unfavorable – following Bessent’s feedback on the 10-year yield, and after latest Fed policymakers’ hints at SLR revisions.

The ten-year and 30-year swap spreads have gone up by about 5 and 10 foundation factors over the previous week, hitting their widest since June 2024 and December 2023, respectively.

TREASURY MARKET RESILIENCE

The Fed in April 2020 quickly excluded Treasuries and central financial institution deposits from the SLR to spice up liquidity as Covid-19 pandemic fears gripped traders. However it let that exclusion expire the next yr.

Fed Chair Jerome Powell informed Congress this week he was supportive of decreasing the ratio, saying it could assist Treasury market liquidity. Fed Governor Michelle Bowman additionally addressed the SLR in a speech final week, saying the Fed ought to “take motion to deal with the unintended penalties of financial institution regulation.”

Travis Hill, appearing chairman of the FDIC, talked about the SLR in remarks final month wherein he referred to as for an overhaul of different U.S. capital guidelines.

The renewed concentrate on the SLR comes amid broader regulatory efforts to enhance liquidity within the Treasury market.

One key reform is a rule adopted by the SEC in December 2023 which can pressure extra trades by clearing homes. Will probably be carried out in phases by June 2026, though Wall Avenue associations have just lately requested regulators for extra time to implement it.

“In gentle of the U.S. Treasury clearing mandate … we need to guarantee that the SLR is just not one of many areas that would impede the flexibility of banks to assist the U.S. Treasury market,” stated Lisa Galletta, head of U.S. prudential danger on the Worldwide Swaps and Derivatives Affiliation. ISDA has advocated for a reform of the rule.

Modifications to the SLR, nevertheless, could solely have a marginal impression on decreasing danger premiums demanded by traders, which affect yields, and will carry some danger, stated Deutsche Financial institution in a latest notice.

“By reducing the resilience of the banking system, it will increase the likelihood of banking stress that might require a fiscal response,” analysts stated.

(Reporting by Davide Barbuscia; enhancing by Megan Davies and Nia Williams)

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