WASHINGTON—The Federal Reserve said Friday it would allow a yearlong reprieve for the way big banks account for ultrasafe assets such as Treasury securities to expire as scheduled at the end of the month, a loss for Wall Street firms that had pressed for an extension to the relief.
The decision means banks will lose the temporary ability to exclude Treasurys and deposits held at the central bank from lenders’ so-called supplementary leverage ratio. The ratio measures capital—funds that banks raise from investors, earn through profits and use to absorb losses—as a percentage of loans and other assets. Without the exclusion, Treasurys and deposits count as assets.
The Fed said it would soon propose longer-term changes to the rule to address its treatment of ultrasafe assets.
“Because of recent growth in the supply of central bank reserves and the issuance of Treasury securities, the board may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability,” the Fed said in a statement.
The Fed stressed that overall capital requirements for big banks wouldn’t decline.
The central bank adopted the temporary exclusion a year ago in an effort to boost the flow of credit to cash-strapped consumers and businesses and to ease strains in the Treasury market that erupted when the coronavirus hit the U.S. economy. The market has since stabilized.
Banks and their industry groups had pressed for an extension to the relief, saying that without it banks might pull back significantly from Treasury purchases, which would add to the upward pressure on bond yields that has rattled markets in recent weeks.
They warned that without the relief, some firms may come close to violating the capital requirements over the coming months. To keep that from happening, they may be forced to buy fewer Treasuries or shy away from customer deposits, the banks said.
This would leave the banks playing a smaller role as intermediaries in the Treasury market, or holding fewer deposits—which they use to buy Treasurys or park as Fed reserves—just as Congress passed a $1.9 trillion relief bill that could push an additional $400 billion in stimulus payments into depository accounts, and lead to more federal government borrowing, analysts say.
Senior Democrats such as Senate Banking Committee Chairman Sherrod Brown of Ohio and Sen. Elizabeth Warren of Massachusetts said before the Fed’s decision that an extension of the relief would be a “grave error,” weakening the postcrisis regulatory regime.
“Opposition in Congress against the relaxation of bank regulation is strong,” wrote Roberto Perli and Benson Durham of Cornerstone Macro, an investment research firm, before the Fed’s announcement.
Big U.S. banks must maintain capital equal to at least 3% of all of their assets, including loans, investments and real estate. By holding banks to a minimum ratio, regulators effectively restrict them from making too many loans without increasing their capital levels.
The banks are sitting on giant stockpiles of cash, U.S. government debt and other safe assets. By tweaking how the ratio is calculated last year, the Fed was effectively trying to engineer a swap. Remove Treasurys and central bank deposits from the calculation, the thinking went, and banks should be able to replace them in the asset pool with loans to consumers and businesses.
It is unclear if that happened. U.S. lenders saw their loan books increase about 3.5% last year, the slowest pace in seven years, according to research from Barclays using Federal Deposit Insurance Corp. data.
Write to Andrew Ackerman at andrew.ackerman@wsj.com
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