(Bloomberg) -- Five House Republicans urged Federal Reserve Chair Jerome Powell to take steps to improve liquidity in the Treasury securities market, including considering “targeted” changes to bank capital requirements.
The $29 trillion market for US Treasuries has experienced instances of low liquidity over the past several years, including in early 2020 when the onset of Covid-19 caused a panic that nearly froze trading. That episode prompted the Fed to provide a backstop by buying billions of dollars in Treasuries per day.
Some investors and analysts have claimed such disruptions are linked to the supplementary leverage ratio, or SLR, which they say has deterred banks from acting as market makers.
“Though the market remains strong, it has undergone challenges,” the lawmakers wrote. “Most notably, the volume of US debt has dramatically increased while the capacity of dealers to provide liquidity to the market has been reduced.”
The Fed declined to comment.
The letter was led by Representative Frank Lucas of Oklahoma, chair of a new task force that will examine how to improve the Treasury market’s functioning along with Fed monetary policy and bank regulation.
The lawmakers in the letter asked the Fed Board of Governors to solicit public comment on improvements to the supplementary leverage ratio and the enhanced supplementary leverage ratio in order to “improve liquidity in the Treasury market.”
“We urge the board to assess targeted changes,” they added.
The SLR was introduced in the US in 2014 as part of the Basel III reforms to banking regulation agreed to by central banks in a host of developed-market countries. It requires financial institutions to hold capital against their portfolios, including inventories of Treasuries. The so-called enhanced SLR forced the largest and most interconnected banks to meet an even higher capital threshold.
Powell expressed support for reducing the SLR during congressional testimony last month.
“That’s something I do expect we will return to and work on with our new colleagues at the other agencies and get done,” Powell said.
--With assistance from Christopher Condon.
