The Federal Reserve has taken a significant step to potentially boost liquidity in the U.S. Treasury market. In a 5-2 vote during their June 25th Washington D.C. meeting, the Fed approved a draft proposal to relax a key capital requirement for the country’s largest banks.

This move targets the enhanced supplementary leverage ratio (eSLR), a post-2008 regulation designed to ensure banking stability. The eSLR mandates that Global Systemically Important Banks (GSIBs) hold capital against all assets, regardless of risk. The Fed argues that this regulation inadvertently discourages banks from holding low-risk assets like U.S. Treasuries.

By easing the eSLR, the Fed aims to incentivize banks to hold more of these low-risk securities. This, in turn, is intended to improve their ability to act as intermediaries in the Treasury market, particularly during times of financial stress when liquidity is crucial. The proposed changes aim to reduce regulatory pressure and make it easier for these institutions to fulfill this critical role.

The proposal’s next step is publication in the Federal Register, opening a 60-day window for public comment. This period allows for valuable input from stakeholders and experts before the final decision is made.