Last Friday, the Federal Reserve announced that it will not extend capital relief granted to bank holding companies at the onset of the pandemic in relation to the supplementary leverage ratio (SLR). On April 1, 2020, the Fed created an exemption within the SLR framework that allowed banks to exclude Treasuries and Fed reserves from the calculation of the ratio, essentially relaxing the amount of capital that banks had to maintain against Treasuries and deposits and, in turn, lowering the overall capital requirements for the financial sector. But that exemption is now officially set to expire at the end of this month on March 31. In light of the Fed’s decision not to extend the capital relief, banks will either be forced to hold additional capital or reduce their Treasury holdings – more likely, a combination of both. 

According to Morgan Stanley, the expiration of the SLR calculation exemption will have a more pronounced impact on JP Morgan, Citigroup, Goldman Sachs, and Bank of America but will not leave their SLRs in jeopardy of breaching the regulatory threshold. In order to ensure that they are able to meet their SLR requirements, banks have a few options; they can turn down deposits which will lower their reserve requirements, reduce the amount of share buybacks, sell Treasuries, or issue additional preferred stock. Following Friday’s announcement, Fed officials stated that the banking sector remains extremely well-capitalized and that they do not believe the largest banks will need to sell large blocks of Treasuries to meet their requirements.