US banks add $130bn in carve-out assets as SLR relief ends

JP Morgan led the top US banks in increasing their stock of US Treasuries and excess reserves

Six of the eight US systemic banks continued to pile on US Treasuries and excess reserves in the first three months of the year, despite the impending end of the Federal Reserve relief for leverage exposure.

Such holdings returned to weigh on the banks’ supplementary leverage ratios (SLRs) on April 1, after the Fed revoked permission to exclude them from the denominator.

On aggregate, the banks increased their stock of Treasuries and excess reserves by $130 billion to $2.3 trillion in the first quarter of 2021.

JP Morgan accounted for 91% of the aggregate increase alone, adding exposures subject to the SLR waiver to the tune of $118 billion to $800.6 billion. The bank’s reported SLR for end-Q1 was 6.74%. Without the relief, it would have been 5.49%.



Bank of America added $18.9 billion of carved-out assets to $448.3 billion. It reported an SLR of 7.01%, almost one percentage point higher than it would have been without the Fed relief.

Wells Fargo’s SLR pre- and post-relief also diverged by almost one percentage point, after the bank added $7.6 billion of Treasuries and excess reserves to $272.9 billion.

Morgan Stanley posted $155.2 billion in carved-out assets, adding $11.1 billion in Q1. The reported ratio was 6.65%, but would have been 5.92% absent the Fed relief.

Goldman Sachs added $2.4 billion to $205.1 billion. As of end-March, there was a 90bp difference between its reported SLR and the ratio without relief.

BNY Mellon added $975 million of exposures subject to the SLR waiver. The bank’s reported SLR was 8.12%, but would have been 7.44% without the measure in place.

Citi and State Street bucked the trend, shedding $29.7 billion and $800 million of exposures under the special treatment to $410.1 billion and $12.8 billion, respectively.


What is it?

The supplementary leverage ratio 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 minimum SLRs of at least 3% to be in compliance with the rule. US systemic banks are also subject to an additional buffer requirement of 2% at the holding company level, making their all-in minimum threshold 5%.

On April 1, 2020, the Federal Reserve amended the SLR, allowing banks to exclude US Treasuries and excess reserves from the denominator. The carve-out ended on March 31 this year.

Why it matters

Our analysis shows that despite the telegraphed phase-out by the Fed, most lenders continued to increase their reliance on exempted assets during the first quarter of the year.

Between pandemic stimulus checks, pent-up savings and ultra-cheap wholesale financing, mammoth amounts of spare cash are sloshing around in the US economy. But with not nearly enough demand for credit to absorb it, the country’s top lenders had little choice but to keep building Fed reserves or gobble up yet more Treasuries.

JP Morgan chief executive Jamie Dimon has been irked by what he sees as a pig-headed decision amid a glut of liquidity. “We have $2.2 trillion deposits, $1 trillion loans, $1.5 trillion of cash and marketable securities, much of which cannot be deployed to intermediate or lend. Now how conservative do you want to get?” he said in April.

The Fed has admitted the brand new world of ultra-liquidity may require a readjustment to the SLR framework. Any developments in this sense are likely to be scrutinised closely across the Atlantic: in June, European Union regulators are expected to decide whether to enshrine their own temporary leverage ratio relief into a permanent fixture.

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