The chair of the Federal Reserve essentially took a pass Wednesday when asked a question during a press conference about the future of the revised supplementary leverage ratio (SLR), which is set to expire in two weeks.
But, he indicated, he’ll have more to say about that expiration in coming days.
Fed Board Chair Jerome H. (“Jay”) Powell, in response to a question from Politico’s Victoria Guida about the expiration of the SLR revision adopted last year – and what the Fed plans to do about it – brushed off the question, saying he would have something to announce in coming days. He then asked the reporter to ask another question instead (which she did, about the Fed’s Summary of Economic Projections [SEP], which, among other things, shows inflation rising briefly to 2.4% later this year but then receding).
The SLR is a measure of capital adequacy that measures, in percentage terms, a bank’s ability to take losses on its assets. It compares tier 1 capital at a bank to the bank’s total leverage exposure. It generally applies to financial institutions with more than $250 billion in total consolidated assets, requiring them to hold a minimum ratio of 3%, measured against their total leverage exposure, with more stringent requirements for the largest and most systemic financial institutions.
Last year, in response to the financial impact of the coronavirus crisis, the Fed announced a one-year easing in holding companies’ SLR requirements in an effort both to ease strains in the Treasury market resulting from the coronavirus crisis and to increase banks’ ability to provide credit to households and businesses.
The Fed said last year that the change approved – to exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation in the SLR rule for holding companies – would temporarily decrease the institutions’ tier 1 capital requirements by approximately 2% in aggregate.
In other comments, Powell indicated that the Fed sees limited risks to financial stability, at least for new. He noted that asset valuations were elevated in some aspects of the economy, but that debt owed by households and businesses were relatively low (particularly among households, which have lowered their debt loads). “Nothing in those two sectors jumps out as troubling,” he said.
Short-term funding, however, may face ongoing stress. “We don’t feel like we can let the moment pass without saying again that some aspects of short-term funding market, more broadly non-bank financial intermediation, did not hold up so well under great, tremendous stress, so we need to go back and look at that,” he said. He called doing that a very high priority for the Fed as well as other federal financial regulators to “see if we can strengthen those things.”