SLR Relief Incoming? Banks Are Loading Up on Treasuries Again.
- The ValueCritic
- 2 days ago
- 4 min read
In recent weeks, US banks have ramped up their purchases of Treasury securities, adding over $70bil since April. On the surface, this may seem counterintuitive: Treasury issuance is rising, the Fed is still in quantitative tightening (QT) mode, and real yields remain elevated. So what’s driving this sudden appetite?
The answer may lie not in macroeconomic expectations, but in regulatory positioning, specifically around the Supplementary Leverage Ratio (SLR).
What is the SLR and Why It Matters Now
The SLR is a post crisis capital regulation that requires large US banks (especially GSIBs) to hold a minimum amount of capital against their total leverage exposure including Treasuries and reserves. During the pandemic, the Fed temporarily excluded Treasuries and reserves from the SLR calculation to ease balance sheet constraints. That exemption expired in March 2021.
But now, we’re seeing early signs that regulators may be preparing to adjust the SLR again.
Recent changes to FFIEC reporting guidance show expanded data collection from banks on SLR exposures, typically a precursor to regulatory shifts. In addition, the timing is crucial: the Treasury is ramping up long end issuance, the Fed is letting assets roll off its balance sheet, and banks remain key marginal buyers in a fragmented market.
If SLR constraints are eased, either by excluding Treasuries again or tweaking calibration banks could absorb more government debt without capital penalties, solving a major supply demand friction in the Treasury market.
The surge in Treasury demand from banks comes ahead of a likely 2025 debt ceiling confrontation, which will place Washington’s fiscal trajectory under intense scrutiny. At the same time, Trump’s proposed tax agenda, including eliminating taxes on tips, overtime, and Social Security benefits, and extending TCJA provisions, carries a massive fiscal footprint.
Goldman Sachs estimates show that the Trump tax plan could cost up to $131–150 billion per year, or ~0.4% of GDP on average through 2029—even after factoring in large discretionary spending cuts.
Combined with existing structural deficits already above 6.3% of GDP in Q4 24, nearly double the long-term average this points to sustained Treasury issuance, regardless of growth or rate conditions.
Adding to this, the Treasury General Account (TGA), the government’s cash balance at the Federal Reserve, is currently being drawn down, not rebuilt, as policymakers remain locked in ongoing debt ceiling negotiations. Until a new borrowing agreement is reached, the Treasury cannot issue sufficient new debt to replenish the TGA. Instead, it’s relying on existing cash reserves to fund operations, which are expected to be exhausted by August if a deal is not struck.
This drawdown temporarily injects reserves into the banking system, offering a short-term liquidity boost but it is highly temporary and masks underlying pressures. Once a deal is reached, the Treasury will need to rapidly rebuild the TGA, likely through heavy bill issuance, which will drain reserves just as quickly as they were released, effectively tightening liquidity across the financial system in a compressed timeframe.
Compounding this, the Fed’s balance sheet runoff (QT) continues in the background. Although the Fed has recently tapered the pace of QT on the long end, lowering its Treasury runoff cap from $25 bil to $5 bill per mth, it remains a net seller of Treasuries. This means the market must absorb both reinvigorated TGA driven issuance and ongoing SOMA runoff without central bank support.
Put simply, once the debt ceiling is resolved, the Treasury will flood the market with short term debt to refill its cash balance, likely colliding with dealer capacity and regulatory capital constraints. Without SLR relief, banks may be unable to intermediate this supply surge without reducing risk elsewhere, potentially tightening financial conditions and increasing volatility.
This combination, a looming debt ceiling, a liquidity draining TGA rebuild, Trump’s deficit boosting tax agenda, and persistent QT, creates a Treasury demand problem that only balance sheet relief can solve. Without SLR reform, banks remain constrained in their ability to buy Treasuries without breaching capital ratios.
Implications: From Bank Stocks to Bond Yields
Bullish for Bank Stocks: Capital relief improves ROE and reduces constraints on trading desks, particularly for GSIBs like JPMorgan and Citigroup.
Supportive of Treasury Demand: If banks no longer need to “ration” their balance sheets, they can more easily step in to absorb increased issuance, anchoring longer-term rates.
Signals Coordinated Policy Shift: This could be a quiet step toward financial repression 2.0 where regulation and yield curve management work hand in hand to keep borrowing costs low despite rising deficits.
The Treasury is expected to issue a large amount of debt in the months ahead. This may be needed to fund a wide range of priorities such as new tariffs, infrastructure projects, or efforts to move supply chains out of strategic rival countries. However, foreign buyers alone are unlikely to absorb all this new supply.
At the same time, the Fed is continuing to reduce its holdings of Treasuries through quantitative tightening. This means it is no longer buying government bonds and is instead allowing them to roll off its balance sheet. As a result, liquidity is leaving the system. With both rising debt issuance and falling central bank support, the responsibility of absorbing new Treasuries is increasingly falling on US banks.
But banks face limits. Because of the SLR rule, they must hold capital against all assets, including safe ones like Treasuries. This makes it harder for them to buy more bonds without bumping up against capital requirements. Unless that rule is relaxed, banks cannot act as a reliable buyer of last resort.
That is why the recent $70bil surge in bank purchases of Treasuries is so important. It may not be just a technical trade. It looks like banks are positioning in advance of an expected regulatory change. They are preparing for a scenario where capital rules are eased, allowing them to hold more government debt. If the government adjusts the rules, markets will respond quickly. Capital will flow more freely, long-term interest rates may fall, and the financial system will be better equipped to handle a wave of new debt.