In this episode of The SIFMA Podcast, SIFMA Chief Operating Officer Joseph Seidel is joined by Dr. Guowei Zhang, Managing Director at SIFMA, to unpack the critical role of leverage ratios in the U.S. Treasury market – and why exempting them from leverage ratio calculations may be key to strengthening market resilience.

Together, they explore:

• How current leverage ratio requirements, implemented in 2018, may limit banks’ capacity to intermediate in Treasury markets.

• SIFMA’s latest analysis quantifying the impact of U.S. Treasury holdings on bank leverage ratios.

• Evidence from the temporary exemption during the COVID-19 pandemic, and what it tells us about future policy considerations.

With over $28 trillion in outstanding Treasury securities and an average of $910 billion traded daily, the stakes are high. As volatility continues to challenge financial markets, this conversation shines a light on potential policy solutions that support both market stability and economic growth.

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Joseph Seidel: Hello and welcome to the latest edition of the SIFMA Podcast. I am Joe Seidel, SIFMA Chief Operating Officer. I’m joined today by Dr. Guowei Zhang, managing director at SIFMA, to talk about the U.S. Treasury markets and the impact leverage ratios have on the market’s resiliency. The U.S. Treasury market is a bedrock of the global financial system. Today, there are $28 trillion of Treasury securities outstanding. An average of over $910 billion are traded every day. With the current volatility in the markets, it is a particularly prudent time to have this conversation.

Dr. Guowei Zhang: Thanks, Joe The first point we’ll cover today is how leverage ratios implemented in 2018 will limit banks’ market intermediation capacity, particularly in the Treasury market. Next, we’ll explain our analysis to quantify the impact of U.S. Treasury holdings on banks’ leverage ratios. And finally, we’ll demonstrate that the temporary exemption of U.S. treasuries from SLR during the Covid-19 pandemic enhanced the bank’s intermediation capacity during the period.

Seidel: You can access Guowei’s blog and the supporting materials on our website, sifma.org. Comments and questions are welcome; listeners can reach us at [email protected]. So then as we go into the history of leverage ratios by way of be brief background, what is the interplay, Guowei, of the supplemental leverage ratio and banks or financial holding companies’ balance sheets?

Zhang: Starting in January 2018, large U.S. banks have been required to comply with two leverage ratios: the Supplementary Leverage Ratio (SLR) and the U.S. Tier 1 Leverage Ratio. For the largest U.S. banks, SLR cannot go below 5%, and Tier 1 Leverage Ratio 4%. The two ratios have the same numerator but different denominators as a bank’s balance sheet and market conditions change, one ratio will become more restrictive than the other, and the most restrictive ratio is used to determine the bank’s leverage capital requirement.

Leverage capital is designed to be non-risk sensitive, meaning U.S. Treasury securities and high yield corporate bonds are essentially treated the same. During severe market downturns and dash-for-cash scenarios, the expansion of banks’ balance sheets increases the likelihood of leverage ratio becoming binding capital constraints. This leads large banks to reduce market intermediation, including in the U.S. Treasury market. But because these banks are key market makers in both the primary and secondary market for U.S. treasuries reduce market intermediation. But this could be detrimental for the Treasury market.

Seidel: And this is worrisome – these dynamics may have contributed to the dysfunction of the Treasury market and limited banks’ capacity to intermediate as required by the COVID-19 pandemic, for example. Key policymakers, such as the Federal Reserve Board Governor Chair Powell and Governor Bowman, are concerned about Treasury market resilience and supportive of proactive regulatory measures to ensure banks have adequate balance sheet capacity for Treasury market intermediation. Which begs the questions – why not expect Treasuries from the leverage ratio entirely to alleviate balance sheet capacity constraints?

Related to this SIFMA – as published in the recent blog I mentioned – performed analyes to quantify the impacts of U.S. Treasuries holdings on banks’ leverage ratios. Two charts – really encapsulated this nicely. Guowei – could you explain at a high level each of the two charts and the analysis underpinning them?

Zhang: In Table 1 – the first column examines the impact of U.S. Treasury help for trading and total U.S. Treasury on U.S. GSIBs’ supplementary leverage ratio. Take U.S. Treasury held for trading, for example, a beta of -0.0487 indicates each additional 1 billion dollar in Treasury how for trading will depress U.S. GSIBs’ SLR by 4.87 basis points. This impact is significant both statistically and economically.

From an economic perspective as of December 2024, USG GSIBs’ on average, have 81 billions of U.S. Treasury securities for trading. Exempting such holding from easier calculation would have increased this bank’s actual SLR by 3.94 percentage points. The balance sheet capacity freed by U.S. Treasury exemption enables this bank to provide liquidity to the U.S. capital market and increase lending to support the broader economic growth.

Table 1: The impacts of US Treasuries holdings on US GSIBs’ Supplementary Leverage Ratio.

Panel Regression Analysis	SLR	SLR
Constant	bank specific	bank specific
Tier 1 RBC Ratio (%)	0.0798*	0.0815*
UST Held Trading ($bn)	-0.0487***	–
UST Held Total ($bn)	–	-0.0246***
R2	0.1437	0.0902
		*(p<0.05), **(p<0.01), ***(p<0.001) Data Source: FR Y-9C

Source: SIFMA

Table 2 shows similar impacts on U.S. Treasury holdings. GSIBs Tier 1 leverage ratio and figure 1 presents a comparison between the average SLR with a U.S. Treasury security exemption, which is during March 2020 and March 2021, with, the hypothetical SLR without exemption suring the same period. Also presented in figure one is the average U.S. Treasury security held for trading by the U.S. GSIBs.

Table 2: The impacts of US Treasuries holdings on US GSIBs’ Tier 1 Leverage Ratio.

Panel Regression Analysis	Tier 1 LR	Tier 1 LR
Constant	bank specific	bank specific
Tier 1 RBC Ratio %	-0.0139	-0.0125
UST Held (Trading) $bn	-0.0533**	–
UST Held (Total) $bn	–	-0.0280*
R2	0.0498	0.0268
		*(p<0.05), **(p<0.01), ***(p<0.001) Data Source: FR Y-9C

Source: SIFMA

Figure 1: The US Treasuries held for trading and US GSIBs’ supplementary leverage ratio w/ and w/o exemption of US Treasuries from total leverage exposure.

Seidel: So what does this tell us?

Zhang: The data demonstrates that, in the absence of the temporary U.S. Treasury exemption, during the Covid-19 pandemic, the U.S. GSIBs’ would on average have failed to meet the minimum supplementary leverage ratio as required by the current prudential Capital rules, failing to meet minimum capital requirement would have forced these banks to want to one- reaise capital and two- cut exposure, including those arising from market intermediation activities, and three are both.

Due to severe market stresses, it’s generally more practical and easier for banks to cut exposure and reduce market intermediation than raising capital. Therefore, the evidence indicates the temporary exemption would have enhanced banks’ intermediation capacity during this period.

Seidel:  Thanks Guowei – Just to recap us: Bank-affiliated brokers/dealers are key intermediaries in the U.S. Treasury market. Current capital rules require banks to meet risk-based requirements and two leverage ratios.  These leverage ratios, being non-risk-sensitive, often become binding constraints during market downturns, causing brokers/dealers to reduce their market activities at just the wrong time.

With U.S. Treasury issuance set to grow rapidly, and with the current volatility in the market top of mind, we urge the Federal Reserve Board to exempt Treasuries from leverage ratio calculations going forward to ensure banks can effectively intermediate the Treasury market. And with that, thanks so much to our audience for joining us today. And please visit sifma.org to learn more about our work in this space and on behalf of the capital markets broadly. Thank you.

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Related Resource

• Featured Blog

  Enhance Market Resilience by Exempting Treasuries from Leverage Ratios