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A very interesting essay at the following link explains why knowledgeable market participants are concerned about the upcoming March 31, 2021, expiration date for last year's Federal Reserve temporary change to bank holding companies' "Supplementary Leverage Ratio" (SLR).

"Why The SLR Is All That Matters For Markets Right Now"

Last year, as soon as it became apparent that a massive market selloff was occurring due to news of the COVID-19 virus, the Federal Reserve published a 63 page “Regulatory Capital Rule: Temporary Exclusion of U.S. Treasury Securities and Deposits at Federal Reserve Banks from the Supplementary Leverage Ratio”.

The full text of the Fed's rule change may be found at the following link:

In my brief review of the above-described essay, it appears that the temporary change was made by the Federal Reserve to SIFI* bank holding companies' regulatory capital so that mad flows of cash into and out of commercial and retail bank customers' accounts wouldn't so explode Treasury holdings for demand deposit obligations (in the wake of the COVID-19 stock market selloff) that bank holding company balance sheets would be rendered effectively insolvent. The Fed's stated purpose in the rule change was “to ease strains in the Treasury market” and “increase banking organizations’ ability to provide credit to households and businesses.”

However, the pseudonymous author of the first cited essay describes the critical nature of this month's March 31, 2021 temporary rule expiration as follows:

By adjusting the SLR, the Fed enabled enabled banks to hold more “no-risk” securities such as Treasuries without having to add the assets to calculations of how indebted they are. In doing so, the Fed effectively permitted banks to massively expand their leverage and hold as many Treasurys and deposits on their books as the market demanded without punishing them for being in breach of various SLR thresholds. This was critical because at roughly this time, the Fed also unleashed $3 trillion in QE as Helicopter Money was launched in the US, as a result of which banks would end up holding far more bonds and deposits than usual. In total, the SLR adjustment cut the capital demand on big banks by an estimated $55 billion and allowed more than $1 trillion in additional activity.

The essayist goes on to suggest that JP Morgan, in its 4th Quarter presentation describing how negative interest rates could come to US banks, and former NY Fed repo market guru (currently at Credit Suisse), Zoltan Pozsar who wrote last week, “Banks don’t have the balance sheet at the bank operating subsidiary level to add $1 trillion of deposits, reserves, and Treasuries...

My expectation is that the Federal Reserve will have no choice but to extend its "temporary relief" indefinitely, or until markets no longer care about leverage ratios or the effective yield on US Treasury obligations, whichever comes first.

Just like the "temporary emergency measures" (financial repression and ZIRP**) implemented by the Fed in the wake of the 2008 Financial Crisis have now become permanent, I expect that the subject temporary capital ratio rule changes will also somehow become permanent.

It appears to me that whenever the banking capital rules place the financial system at risk of being discovered for the house of cards that it is, the Federal Reserve and its cohorts around the world simply change the rules.

*SIFI (Systemically Important Financial Institutions)

**ZIRP (Zero Interest Rate Policy)

On a separate note, a few of us old timers remember a similar game - where spontaneous rules changes were the norm. That game was "Calvinball."
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