Letter to the Fed on Supplementary Leverage Ratio

The Honorable Randal K. Quarles
The Honorable Lael Brainard,
The Honorable Michelle Bowman

Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Washington, DC, 20551

Dear Honorable Randal K. Quarles, Honorable Lael Brainard and Honorable Michelle Bowman

In May 2020, SIFMA responded to the Board of Governors of the Federal Reserve System’s (the “Federal Reserve's”) interim final rule (the “IFR”) for bank holding companies, which provides a temporary exclusion of U.S. Treasury securities and deposits at the Federal Reserve Banks from the Supplementary Leverage Ratio (“SLR”). SIFMA, The American Bankers Association and the Financial Services Forum members strongly supported the Agencies’ modification to this risk-insensitive, size-based capital requirement to at least partially accommodate for the unprecedented speed and size of monetary expansion that was on the horizon. The exclusion of these near-risk-free assets, however, is set to expire on March 31, 2021, despite Federal Reserve Chairman Jerome Powell’s comment that the Federal Reserve’s balance sheet will continue to expand, and that any future exit by the Federal Reserve (the “Fed”) will be publicly communicated “well in advance of active consideration of beginning a gradual taper of asset purchases.”

The purpose of this letter is to encourage the Federal Reserve to extend the IFR consistent with the expected continued expansion of the Federal Reserve’s balance sheet and significant U.S. Treasury issuance for 2021. We also believe that the IFR extension must be made as soon as possible to better enable banks to engage in efficient capital planning and allocation processes. We believe it is imperative that the continuation of the IFR include both excess reserves and U.S. Treasury securities to preserve the Federal Reserve’s long-standing policy stance that these asset classes are fungible.

As cited in the preamble of the IFR, the U.S. response to the COVID-19 pandemic has resulted in a significant expansion of banking organizations’ balance sheets. Moreover, as noted in the IFR preamble, it was envisioned that the Federal Reserve’s expanded balance sheet would persist for as long as the U.S. government and the Federal Reserve were actively responding to the economic impact of the COVID-19 pandemic. This strongly suggests that the IFR should be extended to correlate with the U.S. government’s and the Federal Reserve’s continuing actions to mitigate the economic impact of the COVID-19 pandemic. In fact, elimination of the IFR would be contrary to the Federal Reserve’s and U.S. Government’s present economic objectives and would have negative implications on current efforts.

The March 31, 2021 expiration of the IFR does not lead to an SLR shortfall for SIFMA members. However, projections for the growth of the Federal Reserve’s balance sheet, future fiscal stimulus, and forward Treasury issuance will result in firms’ SLR requirements becoming more binding. This reduced balance sheet capacity may impact future bank decision making regarding accepting deposits and acting as intermediaries in the U.S. Treasury market. This risks migration of some of this activity to the unregulated non-bank sector and may impact the smooth function and stability of the Treasury markets.

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