● SLR Easing- Liquidity Boost, Risk Creep.

SLR Regulation Easing: Liquidity Supply, Financial Risk, and Prospects for U.S. Treasury Market Stability

1. Policy Announcement and Background

The recent announcement by the Fed to ease eSLR regulations involves readjusting regulatory conditions for U.S. GSIBs and their subsidiaries regarding holdings of Treasury bonds and reserve deposits.Introduced in 2014, eSLR aimed to play a supplementary role in strengthening banks’ resilience after the financial crisis, but it was temporarily eased during the pandemic (2020-2021) to stabilize the Treasury market and facilitate credit supply.Currently, this measure reflects the experience of past temporary easing and the current reality of increased Treasury bond holdings by commercial banks.

2. The Dual Nature of Liquidity Supply and Financial Risk

This regulatory easing is expected to have a positive effect by encouraging banks to hold more Treasury bonds, which are low-risk assets, thereby increasing liquidity supply in the market.In particular, it can help reduce the need for the Fed to intervene to stabilize the Treasury market and curb excessive risk-taking in financial crisis situations.However, at the same time, there are concerns that financial risks may increase in the short term.The capital base of the targeted banks may decrease, potentially weakening the safety net for financial institutions, which was the original purpose of eSLR.

3. Expert Opinions and Analysis

Chairman Powell plans to conduct a 60-day public comment period on this regulatory easing proposal.He believes that it focuses on easing constraints on financial institutions’ brokerage activities in the Treasury market.Vice Chair for Supervision Bowman also expects it to strengthen the resilience of the U.S. Treasury market and reduce the need for Fed intervention in stress situations.On the other hand, former Vice Chair Barr and Governor Cook have expressed concerns that broad easing, including subsidiaries, could increase systemic risk and lead to a decrease in bank capital.Governor Waller urges caution against the side effect of banks avoiding low-risk assets like Treasury bonds by treating all assets equally, contrary to the original intention.

4. Future Outlook and Conclusion

This eSLR regulatory easing can be seen as a significant policy change since the introduction of the system in 2014.Coupled with the current increase in Treasury bond holdings by commercial banks, it is expected to exhibit both positive aspects of increased liquidity and adverse effects of undermining financial stability.It is highly likely that more optimized benchmark interest rate policies and Treasury market stabilization strategies will be developed through the 60-day comment period and discussions with various stakeholders.Economic forecasting experts are paying attention to whether this measure will contribute to the health of the U.S. Treasury market and the stability of the global financial system in the long term.These changes directly affect key economic keywords such as SLR, liquidity, financial risk, Treasury market, and the Fed, so it is necessary to pay attention to the latest policy trends and changes in financial regulations and monitor them continuously.

< Summary >eSLR regulatory easing, introduced in 2014, is currently applied to U.S. GSIBs and their subsidiaries based on the experience of temporary easing during the pandemic.This leads to an increase in Treasury bond holdings by commercial banks, increasing liquidity supply, but simultaneously raises concerns about financial risks and capital reduction.While Chairman Powell and Vice Chair Bowman have expressed positive outlooks, former Vice Chair Barr and Governor Cook are concerned about systemic risks.The final regulatory criteria will be determined through a 60-day comment period, and the stability of the U.S. Treasury market and the global financial system is receiving attention.

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