BREAKINGVIEWS-Banks are dubious savior for US government debt

By Stephen Gandel

NEW YORK, April 9 (Reuters Breakingviews) - Welcome to the cat-in-the-hat school of bank regulation. The children’s book character fixed one problem only by causing another. U.S. Treasury Secretary Scott Bessent might end up doing something similar by pushing for weaker bank capital rules to stop disorderly movements in the country’s government debt markets.

While stocks cheered President Donald Trump’s tariff pause on Wednesday, the pressure on Uncle Sam’s bonds barely eased. The 10-year yield US10YT=RR stood at 4.34% by late afternoon New York time, still up from the previous day and significantly higher than last Friday’s roughly 4% level.

One fix, for Bessent, is to ease the supplementary leverage ratio, or SLR. Unlike the other main capital rule, the SLR specifies a required level of equity relative to a bank’s total balance sheet, rather than factoring in the riskiness of its assets. As a result, lobbyists have long argued that it needlessly deters lenders like JPMorgan JPM.N and Bank of America BAC.N from holding cash or cash-like securities including U.S. debt. Bessent on Wednesday, prior to the tariff retreat, said that changing the rules could be a costless way to allow banks to become “larger more durable” Treasury buyers.

That’s probably true. In April 2020, the Federal Reserve removed Treasuries and cash from the SLR calculation to help markets weather the pandemic. At Bessent’s urging, it could potentially do so again but permanently this time. That would effectively remove the capital constraint on banks dabbling in Treasury markets, in theory allowing them to intermediate between buyers and sellers at a greater scale during times of panic and helping to smooth out prices. Across JPMorgan, Bank of America, Citigroup C.N, Goldman Sachs GS.N, Morgan Stanley MS.N and Wells Fargo WFC.N, removing Treasuries and cash from the SLR would also free up more than $3 trillion of theoretical balance-sheet space for other activities, using Barclays analysts’ estimates.

The recent turmoil in the Treasury market, though, also highlights why it would be foolhardy to encouraging banks to act like U.S. government bonds are free from risk. Lenders have gotten into trouble only recently by treating Treasuries and other government-backed assets as super-safe. That’s exactly what happened to Silicon Valley Bank, which loaded up on U.S. government debt and guaranteed mortgage bonds, only to watch them lose value as rates and yields spiked, blowing a hole in its capital ratio.

The largest U.S. banks have weathered recent economic storms, largely because of regulatory reforms put in place after the financial crisis. Throwing those out to soothe bond markets may be a neat fix, but it would also create a much harder problem to solve later on.

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CONTEXT NEWS

Treasury Secretary Scott Bessent said on April 9 that the U.S. Treasury would play a greater role in bank regulation, Reuters reported citing prepared remarks for a speech at the American Bankers Association.

In early March, Bessent in a speech at the New York Economic Club suggested that regulators should take a hard look at whether a capital requirement known as the supplementary leverage ratio (SLR) should be relaxed to allow U.S. banks to hold more U.S. government bonds.

The SLR is a regulation that applies to the nation's largest banks that specifies a minimum equity ratio as a percentage of total assets. It was implemented to make banks safer after the 2008 financial crisis. During the Covid-19 pandemic, U.S. authorities exempted Treasuries from the requirement, allowing banks to hold more of the securities.

U.S. 10-year Treasury bonds were yielding 4.34% at 4:23 p.m. New York time on April 9, compared with roughly 4% on April 4.