Latest news with #SupplementaryLeverageRatio
The Hill
6 days ago
- Business
- The Hill
Investors beware: Fiscal dominance and financial repression ahead
A cautious Federal Reserve kept policy rates unchanged during the first half of 2025. It was trying to ascertain whether the Trump administration's protectionist measures would result in a one-time price level shift, or whether the radical attempts to reshape global trading patterns might generate persistently elevated inflationary pressures. But the fact that policy rates have not budged since last December has infuriated President Trump. He has repeatedly castigated U.S. monetary authorities for their reluctance to cut rates. Believing that the Fed has fallen behind the curve, President Trump has taken to refer to the Fed chair derisively as 'Too Late' Jerome Powell. Amidst widespread concerns surrounding U.S. fiscal sustainability, President Trump recently suggested that the Federal Reserve should substantially cut policy rates to help lower the mounting interest rate cost associated with servicing the massive government debt. Trump has gone so far as to state that he would pick someone favoring rate cuts to be the next chair of the Fed. Independent analysts forecast U.S. debt-to-GDP ratio to spiral upwards following the passage of the 'big, beautiful bill.' Furthermore, budget deficits are expected to continue to exceed 6 percent of GDP over the coming decade (levels previously attained only during crisis periods). These developments, in conjunction with political pressure on the Fed to lower interest rates, raise the specter of fiscal dominance of monetary policy. 'Fiscal dominance' refers to a scenario in which a government's fiscal needs (reducing an unsustainably large debt burden or persistent deficit) start to constrain or even dictate the actions of the central bank, compromising its ability to conduct independent monetary policy. Economic theory and history have shown that fiscal dominance of monetary policy often leads to elevated inflation levels. 'Financial repression' refers to policies aimed at artificially keeping interest rates low to help governments deleverage gradually over time. Economists have highlighted the crucial role that financial repression, in combination with inflation, played in reducing the post-World War II debt overhang. Controlled interest rates (via explicit or indirect caps on interest rates), capital controls and other financially repressive measures were utilized by the U.S. and other advanced economies in the aftermath of World War II. Several measures currently on the anvil to encourage greater private sector purchases of Treasurys are relatively modest in scope. For instance, the proposed easing of the Supplementary Leverage Ratio requirements (a move expected to boost banks' holdings of Treasurys without violating leverage rules) and the passage of the so-called GENIUS Act (which is expected to encourage the use of stablecoins and thus boost demand for short-dated Treasury bills) are aimed at juicing the demand side of the Treasury market. Looking ahead, more dramatic measures may be necessary to ease the debt burden. In recent years, there has been a greater reliance on short-dated Treasury bills to finance the ballooning deficits and roll over maturing debt. This has reduced the average duration of U.S. government debt. If the Fed bows to political pressure and lowers policy rates (and thus effectively reduces Treasury bill rates), it will temporarily aid Trump administration efforts to ease the interest rate burden. The majority of the outstanding debt, however, is still in the form of longer-dated securities (primarily Treasury notes and bonds). The Fed effectively controls short-term interest rates and it can also influence expected future short-term rates via forward guidance (public communication by monetary authorities of the anticipated direction of future short-term policy rates). However, long-horizon interest rate expectations and term premia are not directly controlled by the central bank. Macroeconomic fundamentals, such as long-run inflation expectations and the natural rate of interest, are crucial determinants of long-term interest rate expectations. Furthermore, term premia are likely to be affected by the extent of inflation uncertainty and underlying shifts in the Treasury market supply-demand dynamics (such as changes in overseas/safe-haven demand). As the debt-to-GDP ratio rises to dangerous levels, and as doubts surrounding the dollar's reserve status emerge, the risk of a term premium spike is significant. If the demand for long-dated Treasury securities from abroad suddenly collapses, and if there is a concomitant flight from the long-end of the yield curve by domestic investors, then pressure will inevitably mount on the Fed to go back to quantitative easing — that is, using reserves newly created by the central bank to acquire long-dated securities. Under current circumstances, this would be tantamount to monetizing portions of the U.S. debt. If interest rates are kept artificially low even as inflationary pressures remain elevated, there is a real risk that investors and savers will face the brunt of the adjustment costs necessary to achieve fiscal sustainability. Given America's status as a rich, mature economy with an aging population, it is unlikely that, even with an AI revolution, we can grow our way of the spiraling debt trap. Absent effective policies to lower budget deficits and retain Treasurys' global allure, bond investors should be prepared for fiscal dominance and financial repression. Vivekanand Jayakumar, Ph.D., is an associate professor of economics at the University of Tampa.
CNBC
30-06-2025
- Business
- CNBC
How to play the outperforming financials sector as the second half of 2025 kicks off
(This is a wrap-up of the key money moving discussions on CNBC's "Worldwide Exchange" exclusive for PRO subscribers. Worldwide Exchange airs at 5 a.m. ET each day.) Investors heading into Monday's session were looking at financials as the sector outperforms. JPMorgan also breaks down its year-end outlook for stocks. David Zervos' outlook on financials David Zervos of Jefferies expects financials to be one of the best performing sectors in the second half of 2025. "I'm very optimistic on deal flow and a deregulatory story that starts to hit the energy sector and financial sector," said Zervos. " I think there is a story here with the SLR (Supplementary Leverage Ratio)." He added: "The administration is very keep on wrestling some regulator purview back into the administration … they want to see deals, they want activity and I think they are going to get it." SLR was established in 2014 as part of the Basel III reforms to monitor banks Tier 1 capital. Last week, big banks passed their most recent stress test, but those were reportedly less vigorous than previous years. Passing the stress test lest major banks to issue dividends to shareholders and announce stock buybacks. The dividend plans are expected to be announced this week. The financial sector is more than 26% higher year to date. JPMorgan 2025 year-end outlook; how to play defense sector Joyce Chang of JPMorgan has a S & P 500 forecast of 6,000 implying a 4% pullback from current levels. "I think we are in a range here, you have slower growth coming and we think higher inflation," said Chang. "You also have very steady retail demand and buybacks, we have been looking at $7 billion-$8 billion daily into equity markets. The technicals could squeeze this higher but we are on a stagflationary tilt here. I would careful calling for much higher market." She added on the headwind from tariffs and trade deals: "We are still looking an effective tariff rate that is 14% that is a $400 billion tax." On a sector level, Chang is bullish on defense and aerospace and said she sees more upside in the European players in the space. "What they are doing at NATO is historic (increasing defense spending), even though it is going to play out over a period of time." Since the June 13 Israel strike on Iran, The EUAD Select STOXX Europe Aerospace & Defense ETF and the ITA iShares US Aerospace & Defense ETF are trading very closely. Baidu releases 'Ernie' bot Chinese tech giant Baidu is scheduled to release it's "Ernie" open source large language model on Monday, seen by many as the biggest AI development out of China since the "Deep Seek" release in January. Dan Ives from Wedbush has high expectations, "We believe Baidu has built an impressive 'Ernie' that will send some potential shockwaves across the AI market and it speaks to China becoming more and more successful on the AI front. I don't expect a 'Deep Seek' moment but the early reads are positive." Kevin Carter of EMQQ Global said investors should also pay attention to Baidu's developments in the autonomous driving space with its "Apollo Go" robotaxi service. " AI and Ernie GPT are important to Baidu, but real-world physical AI is happening right now with robotaxis scaling at an incredible rate," said Carter. "Many analysts have reiterated bullish views on the autonomous mobility market where Waymo is the clear US leader. Baidu's 'Apollo Go' is neck and neck with Waymo in the self-driving car market and has given more rides so far than Waymo so far. Apollo Go also has significantly more room to grow as China has 145 cities with 1 million people versus only nine in the U.S ." U.S.-listed Baidu shares are 4% higher year to date.
Axios
25-06-2025
- Business
- Axios
Bank regulators propose easing capital rule, a win for Wall Street
A trio of financial regulators released proposals on Wednesday that would relax how much banks have to hold against their investments. Why it matters: It is the most significant rule revamp yet for Wall Street in the Trump era, one that loosens requirements for America's largest financial institutions. Driving the news: If finalized, the proposal would be the latest regulatory win for big banks, as well as Republicans in favor of easing the requirement. The big banks argue the requirement, called the Supplementary Leverage Ratio, deters financial institutions from pursuing "safe" investments, including U.S. treasuries. Treasury Secretary Scott Bessent said last month that the tweak would encourage banks to increase their holdings of U.S. treasuries, which would put downward pressure on interest rates. The other side: Opponents say the proposal — put forth by the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency — risks weakening a backstop for risky investments. By the numbers: As it stands, all banks are required to hold 3% of capital against assets, including any levered bets. Big banks have to hold an additional 2%. Instead of that 2%, the new regulation would take an existing and standardized surcharge, tied to the bank's size, and levy the bank half of that number. (The surcharges can range from 1% to 3.5%; a bank would pay half of that.) What they're saying: Michelle Bowman, the Fed's top bank cop, said the requirement has become "a binding constraint," not the backstop regulators originally intended. "When leverage requirements become binding, banks are incentivized to reduce engagement in lower-risk, lower-return activities including intermediating the U.S. Treasury market," Bowman said in a statement. Trump appointed Bowman to the Fed in his first term. The administration nominated her to be the central bank's vice chair for supervision earlier this year. In a separate statement, Fed governor Christopher Waller — also appointed by Trump — said he supported the proposal. Yes, but: At least two top Fed officials oppose the move, including Bowman's predecessor, Michael Barr.
Zawya
17-02-2025
- Business
- Zawya
Trump's focus on US yields fuels bets on bank leverage rule review
NEW YORK - The Trump administration's pledge to contain long-term U.S. Treasury yields has strengthened bond market expectations that a long-desired regulatory shift on bank leverage requirements could be finally looming. Some traders are betting regulators may soon focus on a review of the Supplementary Leverage Ratio (SLR), a rule requiring big U.S. banks to hold an extra layer of loss-absorbing capital against U.S. government debt and central bank deposits. The possible policy change would mean banks would not need to set aside as much extra money when they hold safe assets like Treasuries. This could eventually help push U.S. Treasury yields lower, some investors and analysts said, by giving banks more leeway to hold Treasuries and likely boosting demand. The anticipation comes after U.S. Treasury Secretary Scott Bessent said last week that President Donald Trump's administration was focused on containing 10-year Treasury yields, a building block of global financial markets and a benchmark for consumers' borrowing costs. The White House and the Treasury Department did not immediately respond to requests for comment. Ryan O'Malley, head of portfolio management at Ducenta Squared Asset Management, said a potential review of the SLR would be positive for the Treasury market and other debt assets, which would benefit from banks freeing up their balance sheets. "It will increase their demand for Treasuries and other assets. It will also probably strengthen banks' credit profile," he said. The SLR was introduced as part of regulatory efforts following the 2008 global financial crisis. Over time, however, many Treasury market participants have come to see it as a major obstacle to banks providing liquidity to traders, particularly at times of heightened volatility. The Bank Policy Institute (BPI), a trade association representing large U.S. banks, said in a recent paper that a recalibration of the ratio would be crucial to preserving market functioning, particularly given the prospect of rising government debt issuance due to large budget deficits. "We think changes to the SLR could be made relatively quickly," Francisco Covas, executive vice president and head of research at BPI, told Reuters in an interview. The SLR should be near the top of the list of capital priorities for U.S. regulators, Covas added, referring to the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. Spreads of swap rates over Treasury yields have widened in recent days, a sign that investors are starting to anticipate a review of the rule. Interest rate swaps allow traders to hedge interest rate risk by exchanging a floating rate for a fixed rate, or vice versa. Swap spreads, which have been deeply negative over the last few years, widened - or become less negative - following Bessent's comments on the 10-year yield, and after recent Fed policymakers' hints at SLR revisions. The 10-year and 30-year swap spreads have gone up by about five and 10 basis points over the past week, hitting their widest since June 2024 and December 2023, respectively. TREASURY MARKET RESILIENCE The Fed in April 2020 temporarily excluded Treasuries and central bank deposits from the SLR to boost liquidity as Covid-19 pandemic fears gripped investors. But it let that exclusion expire the following year. Fed Chair Jerome Powell told Congress this week he was supportive of reducing the ratio, saying it would help Treasury market liquidity. Fed Governor Michelle Bowman also addressed the SLR in a speech last week, saying the Fed should "take action to address the unintended consequences of bank regulation." Travis Hill, acting chairman of the FDIC, mentioned the SLR in remarks last month in which he called for an overhaul of other U.S. capital rules. The renewed focus on the SLR comes amid broader regulatory efforts to improve liquidity in the Treasury market. One key reform is a rule adopted by the SEC in December 2023 which will force more trades through clearing houses. It will be implemented in phases by June 2026, even though Wall Street associations have recently asked regulators for more time to implement it. "In light of the U.S. Treasury clearing mandate ... we want to make sure that the SLR is not one of the areas that could impede the ability of banks to support the U.S. Treasury market," said Lisa Galletta, head of U.S. prudential risk at the International Swaps and Derivatives Association. ISDA has advocated for a reform of the rule. Changes to the SLR, however, may only have a marginal impact on reducing risk premiums demanded by investors, which influence yields, and could carry some risk, said Deutsche Bank in a recent note. "By lowering the resilience of the banking system, it increases the probability of banking stress that would require a fiscal response," analysts said.
Yahoo
14-02-2025
- Business
- Yahoo
Analysis-Trump's focus on US yields fuels bets on bank leverage rule review
By Davide Barbuscia NEW YORK (Reuters) - The Trump administration's pledge to contain long-term U.S. Treasury yields has strengthened bond market expectations that a long-desired regulatory shift on bank leverage requirements could be finally looming. Some traders are betting regulators may soon focus on a review of the Supplementary Leverage Ratio (SLR), a rule requiring big U.S. banks to hold an extra layer of loss-absorbing capital against U.S. government debt and central bank deposits. See for yourself — The Yodel is the go-to source for daily news, entertainment and feel-good stories. By signing up, you agree to our Terms and Privacy Policy. The possible policy change would mean banks would not need to set aside as much extra money when they hold safe assets like Treasuries. This could eventually help push U.S. Treasury yields lower, some investors and analysts said, by giving banks more leeway to hold Treasuries and likely boosting demand. The anticipation comes after U.S. Treasury Secretary Scott Bessent said last week that President Donald Trump's administration was focused on containing 10-year Treasury yields, a building block of global financial markets and a benchmark for consumers' borrowing costs. The White House and the Treasury Department did not immediately respond to requests for comment. Ryan O'Malley, head of portfolio management at Ducenta Squared Asset Management, said a potential review of the SLR would be positive for the Treasury market and other debt assets, which would benefit from banks freeing up their balance sheets. "It will increase their demand for Treasuries and other assets. It will also probably strengthen banks' credit profile," he said. The SLR was introduced as part of regulatory efforts following the 2008 global financial crisis. Over time, however, many Treasury market participants have come to see it as a major obstacle to banks providing liquidity to traders, particularly at times of heightened volatility. The Bank Policy Institute (BPI), a trade association representing large U.S. banks, said in a recent paper that a recalibration of the ratio would be crucial to preserving market functioning, particularly given the prospect of rising government debt issuance due to large budget deficits. "We think changes to the SLR could be made relatively quickly," Francisco Covas, executive vice president and head of research at BPI, told Reuters in an interview. The SLR should be near the top of the list of capital priorities for U.S. regulators, Covas added, referring to the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. Spreads of swap rates over Treasury yields have widened in recent days, a sign that investors are starting to anticipate a review of the rule. Interest rate swaps allow traders to hedge interest rate risk by exchanging a floating rate for a fixed rate, or vice versa. Swap spreads, which have been deeply negative over the last few years, widened - or become less negative - following Bessent's comments on the 10-year yield, and after recent Fed policymakers' hints at SLR revisions. The 10-year and 30-year swap spreads have gone up by about five and 10 basis points over the past week, hitting their widest since June 2024 and December 2023, respectively. TREASURY MARKET RESILIENCE The Fed in April 2020 temporarily excluded Treasuries and central bank deposits from the SLR to boost liquidity as Covid-19 pandemic fears gripped investors. But it let that exclusion expire the following year. Fed Chair Jerome Powell told Congress this week he was supportive of reducing the ratio, saying it would help Treasury market liquidity. Fed Governor Michelle Bowman also addressed the SLR in a speech last week, saying the Fed should "take action to address the unintended consequences of bank regulation." Travis Hill, acting chairman of the FDIC, mentioned the SLR in remarks last month in which he called for an overhaul of other U.S. capital rules. The renewed focus on the SLR comes amid broader regulatory efforts to improve liquidity in the Treasury market. One key reform is a rule adopted by the SEC in December 2023 which will force more trades through clearing houses. It will be implemented in phases by June 2026, even though Wall Street associations have recently asked regulators for more time to implement it. "In light of the U.S. Treasury clearing mandate ... we want to make sure that the SLR is not one of the areas that could impede the ability of banks to support the U.S. Treasury market," said Lisa Galletta, head of U.S. prudential risk at the International Swaps and Derivatives Association. ISDA has advocated for a reform of the rule. Changes to the SLR, however, may only have a marginal impact on reducing risk premiums demanded by investors, which influence yields, and could carry some risk, said Deutsche Bank in a recent note. "By lowering the resilience of the banking system, it increases the probability of banking stress that would require a fiscal response," analysts said.
