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Enhance Market Resilience by Exempting Treasuries from Leverage Ratios

Key Points

  • Leverage capital requirements are inherently non-risk-sensitive. During severe market downturns and “dash for cash” scenarios, the expansion of large banks’ balance sheets increases the likelihood of leverage ratios becoming binding capital constraints. This leads banks to reduce market intermediation, including in the U.S. Treasury market.
  • Key policymakers, such as the Federal Reserve Board Chair Jerome Powell and Governor Michele Bowman, are concerned about Treasury market resilience and support proactive regulatory measures to ensure banks have adequate balance sheet capacity for Treasury market intermediation.
  • We quantify the impacts of U.S. Treasuries holdings on banks’ leverage ratios and demonstrate that exempting Treasuries from leverage ratios would significantly alleviate balance sheet capacity constraints.
  • With the current volatility in the Treasury market as a backdrop, policymakers would be prudent to examine these ways to enhance market resiliency in short order.

Background

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 (“Tier 1 LR”). The most restrictive leverage ratio becomes the binding capital requirement. Unlike risk-based capital, leverage capital is designed to be non-risk-sensitive, meaning U.S. Treasury securities and high-yield corporate bonds are treated similarly. During severe market downturns and “dash for cash” scenarios, the expansion of large banks’ balance sheets increases the likelihood of leverage ratios becoming binding capital constraints. This leads bank-affiliated brokers/dealers to reduce market intermediation, including in the U.S. Treasury market.1

According to the Group of Thirty, 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.2 Concerned about Treasury market resilience, the Federal Reserve Board Governor Bowman supports “proactive regulatory measures to ensure primary dealers have adequate balance sheet capacity to intermediate the Treasury market.”3 The Chair of the Federal Reserve Board, Powell, articulated a similar perspective during his testimony on February 11, 2025.4

Bloomberg reported on April 7th that “big banks and other dealers are at risk of getting hit” by market chaos, and “primary dealers have had more supply to digest, and with holdings near all-time highs, their ability to function as an intermediary is constrained.”5

The Growth of US Treasury Issuance and Dealers’ Balance Sheet Capacity

In January 2025, the Congressional Budget Office projects that the amount of U.S. national debt held by the public will grow from $30.103 trillion in 2025 to $52.056 trillion in 2035 – an 85% increase over 10 years, with an annual growth rate of 5.7%.6 ,7 As of March 2025, the New York Fed lists 25 firms as primary dealers.8 Among the 25 firms, 21 are broker/dealer subsidiaries of large banking holding companies, including 6 of the 8 U.S. Global Systemically Important Banks (GSIBs).9 In addition to serving as primary dealers, these large banks also act as secondary market intermediaries with banks and non-banks.

To accommodate the anticipated Treasury issuance, these large banks’ balance sheet capacity must increase at a comparable rate over the next decade. The Federal Reserve’s annual report indicates that the total assets of the 8 U.S. GSIBs grew from $10.3 trillion to $14.9 trillion between December 2013 and December 2023, reflecting an annual growth rate of 3.8%, which is only two-thirds of the growth rate required to keep pace with anticipated Treasury issuance. Thus, bank balance sheet growth alone is insufficient. Therefore, regulatory measures are needed to ensure that dealers have sufficient balance sheet capacity to facilitate the Treasury market.

Mandatory Clearing of US Treasury Securities and Repos

Two significant regulatory measures have been implemented in the United States to improve Treasury market liquidity: (1) The Securities and Exchange Commission mandated the clearing of U.S. Treasury cash and repo trades; and (2) In response to the pandemic, the Federal Reserve Board temporarily exempted Treasury securities and central bank reserves from the SLR calculation from March 2020 to March 2021.

In the final rule published in December 2023, the Securities and Exchange Commission highlights efficiencies such as greater balance sheet netting of offsetting trades and reducing counterparty credit risk in the market among the benefits of mandatory clearing for U.S. Treasuries.10 In theory, greater balance sheet netting and lower counterparty credit risk are expected to enhance bank-affiliated brokers/dealers’ capacity to intermediate in the Treasury market. However, these effects are not expected to produce significant benefits in practice.

A New York Fed 2024 study found that “[f]or each of these [U.S. GSIB] firms, the additional netting under expanded central clearing would have lowered their [SLR] values by less than 10 basis points”.11 And this “added netting benefits would have been indistinguishable from any other typical quarterly [SLR] movements in the data.” In June 2023, the Bank of England published a research paper evaluating the potential advantages of broader central clearing in the UK gilt and gilt repos market on dealer balance sheets, particularly before the March 2020 dash for cash. The paper concluded that central clearing would have “boosted [dealers’] aggregate leverage ratio by 3 basis points” – less than one hundredth of the minimum leverage ratio of 3.25% that UK banks are required to hold.12

Additionally, increased balance sheet netting and reduced counterparty credit risk in the context of cross-product netting lower the margin requirements imposed by clearing houses. But lower margin requirements generally result in higher capital requirements for counterparty credit risk under current U.S. prudential capital regulations (we provide further details on this subject and propose potential solutions elsewhere).13 This further restricts, rather than enhances, banks’ ability to intermediate in the Treasury market.

However, exempting Treasury securities from leverage ratios calculation would notably improve banks’ ability to facilitate market-making activities in the Treasury market.

Exemption of Treasury Securities from Leverage Ratios

We perform econometric analyses to quantify the effects of U.S. Treasuries holdings on banks’ leverage ratios, utilizing FR Y-9C data from the 8 U.S. GSIBs for the period spanning March 2018 to December 2024.

Table 1 shows betas on SLR. The first column examines Tier 1 risk-based capital ratio (“Tier 1 RBC Ratio”), U.S. Treasuries held for trading (“UST Held Trading”), and total U.S. Treasuries held (“UST Held Total”). A beta of -0.0487 indicates $1bn in U.S. Treasuries lowers a U.S. GSIB’s SLR by 4.87 basis points. As of December 2024, exempting UST Held Trading ($81bn average) would have increased SLR by 3.94 percentage points. Exempting all U.S. Treasury securities ($222.74bn average) would have increased SLR by 5.48 percentage points, reducing SLR’s bindingness and enhancing large banks’ intermediation capacity. Table 2 shows similar impacts on Tier 1 LR.

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

Panel Regression AnalysisSLRSLR
Constant bank specificbank specific
Tier 1 RBC Ratio (%)0.0798*0.0815*
UST Held Trading ($bn)-0.0487***–
UST Held Total ($bn)–-0.0246***
R20.14370.0902
*(p<0.05), **(p<0.01), ***(p<0.001)
Data Source: FR Y-9C

Source: SIFMA

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

Panel Regression AnalysisTier 1 LRTier 1 LR
Constant bank specificbank specific
Tier 1 RBC Ratio %-0.0139-0.0125
UST Held (Trading) $bn -0.0533**–
UST Held (Total) $bn–-0.0280*
R20.04980.0268
*(p<0.05), **(p<0.01), ***(p<0.001)
Data Source: FR Y-9C

Source: SIFMA

Figure 1 presents a comparison between the average actual SLR with the U.S. Treasury securities exemption (March 2020-March 2021), the hypothetical SLR without the exemption during the same period, and the U.S. Treasury securities held for trading by eight U.S. GSIBs. The data demonstrates that, in the absence of the temporary exemption, the U.S. GSIBs would, on average, have failed to meet the minimum supplementary leverage ratio of 5% as mandated by current prudential capital regulations. The temporary exemption evidently enhanced banks’ intermediation capacity during this period.

 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.

US GSIBs' Supplementary Leverage Ratio and US Treasuries Held for Trading

Source: SIFMA

Conclusion

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 – SLR and Tier 1 LR. Leverage ratios, being non-risk-sensitive, often become binding constraints during market downturns, causing brokers/dealers to reduce their market activities. 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 to ensure banks can effectively intermediate the Treasury market.

Author

Dr. Guowei Zhang is Managing Director and Head of Capital Policy for SIFMA

Footnotes

  1. FR Y-9C and FFIEC101 data indicates that even with the temporary exemption of Treasury securities and central bank reserves from SLR, some of the U.S. GSIBs still observed SLR being the binding capital constraints for some quarters during the period of March 2020-March 2021. [↩]
  2. https://group30.org/images/uploads/publications/G30_Treasury-Mkts-UPDATE_Final_Report.pdf [↩]
  3. https://www.federalreserve.gov/newsevents/speech/bowman20250205a.htm [↩]
  4. https://www.federalreserve.gov/newsevents/testimony/powell20250211a.htm [↩]
  5. https://www.bloomberg.com/news/articles/2025-04-07/market-chaos-puts-wall-street-on-alert-for-us-funding-strains?srnd=homepage-americas [↩]
  6. https://www.cbo.gov/publication/61172#_idTextAnchor038 [↩]
  7. The CBO assumes that the 2017 tax cuts will expire, no economic crises, no global pandemics and no serious wars. [↩]
  8. Primary dealers are trading counterparties of the New York Fed in its implementation of monetary policy. They are also expected to make markets for the New York Fed on behalf of its official accountholders as needed, and to bid on a pro-rata basis in all Treasury auctions at reasonably competitive prices. ((https://www.federalreserve.gov/publications/2023-ar-supervision-and-regulation.htm [↩]
  9. At the time of writing, the Bank of New York Mellon Corporation and State Street Corporation are the 2 U.S. GSIBs that are not on the New York Fed primary dealers list. [↩]
  10. https://www.sec.gov/newsroom/press-releases/2023-247 [↩]
  11. https://www.federalreserve.gov/econres/feds/files/2024057pap.pdf [↩]
  12. https://www.bankofengland.co.uk/working-paper/2023/the-potential-impact-of-broader-central-clearing-on-dealer-balance-sheet-capacity [↩]
  13. https://www.isda.org/a/B4YgE/Cross-product-Netting-Under-the-US-Regulatory-Capital-Framework.pdf [↩]

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