Following Fed relief, SLR bonds loosen for top US banks

Systemic US banks saw their supplementary leverage ratios (SLR) leap higher in Q2 following action by the Federal Reserve to exclude certain assets from the total exposure measure. Over $1 trillion of leverage exposure was freed up by the agency’s intervention across five top lenders alone. 

Bank of America, BNY Mellon, Citi, Goldman Sachs, JP Morgan and Morgan Stanley all disclosed their actual SLR and what their SLR would have been without the Fed’s intervention on April 1, which carved out excess reserves and US Treasuries from the ratio’s denominator. The average difference was 78 basis points in size.

JP Morgan posted an actual SLR of 6.8%, but without the Fed relief it would have been 110bp lower. This implies that roughly $522 billion of assets were excluded from the denominator – 16% of its unadjusted total leverage exposure. Had these carved-out exposures been subject to the 5% SLR minimum requirement, the bank would have had to set aside some $26 billion of Tier 1 capital to cover them.


Morgan Stanley reported a Q2 SLR of 7.3%, and that it would have been 90bp lower absent the carve-out. This equates to $131 billion of excluded exposures and around $6.5 billion of ‘freed’ capital. 

Goldman Sachs said its actual SLR of 6.7% would have been 5.9% without the Fed relief. The bank did not disclose the amount of Tier 1 capital and total leverage exposure it had in Q2, precluding a calculation of its SLR savings.

Bank of America’s SLR would have been around 75bp lower than the 7% it disclosed for Q2 without the reprieve, according to a spokesperson. This implies $297 billion of exposure carve-outs and a Tier 1 capital ‘saving’ of roughly $15 billion.

Citi’s 6.36% SLR was 70bp higher than it would have been unadjusted, meaning $275 billion of leverage exposure was cut from the denominator, liberating $14 billion of capital.

BNY Mellon posted a smaller, 40bp difference between its actual and unadjusted SLR. Roughly $16 billion of exposures were carved out and $725 million of capital freed. As a custody bank, BNY Mellon already benefits from a permanent adjustment to its SLR denominator.

Wells Fargo and State Street did not disclose their unadjusted SLRs for the second quarter. 

What is it?

The SLR is the US implementation of the Basel III Tier 1 leverage ratio, calculated as Tier 1 capital divided by total leverage exposure. Systemic US bank holding companies and the intermediate holding companies of foreign banks must maintain SLRs of more than 5% to be in compliance with the rule.

On April 1, the Federal Reserve granted a break to Wall Street lenders, allowing them to expunge US Treasuries and excess reserves from the SLR denominator. The carve-out is scheduled to end on March 31, 2021. 

Why it matters

The Fed amended the SLR to ease the capital burden banks face when holding an ever-growing amount of reserves at the central bank and dealing in US Treasuries.

As the coronavirus crisis escalated in March, top banks were flooded with deposits that they shunted into their Fed accounts, and with government debt as the US rushed to finance economic relief measures. This build up threatened to restrict their market-making capabilities, as the inflow swelled leverage exposures so much that they risked bumping up against their 5% SLR minimums.

The Q2 data shows that the Fed relief had a huge effect on bank balance sheets. Those firms constrained by the SLR, like Morgan Stanley, reaped the greatest benefit, as they were able to free capital to back increased market-making. Others, like JP Morgan, are more bound by their risk-based capital ratios, making the SLR relief useful, but less effective in liberating capital. 

Questions remain, though, as to what extent banks are redeploying their freed-up leverage exposure. The time-limited nature of the relief has some bank treasurers saying there’s no room to make significant strategic adjustments to their balance sheets. This could mean the Fed achieves less with its SLR intervention than it initially hoped for.

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