- The Trump administration plans the largest cut to bank capital requirements in over a decade, aiming to stimulate demand for 10-year Treasury notes.
- The move could lower yields on long-term government debt, easing federal debt servicing costs and supporting broader economic activity.
- Critics warn the change risks weakening banks’ capital cushions, a reminder underscored by the 2023 bank failures.
Regulatory Rollback With a Purpose
The Trump administration is preparing to loosen the Supplementary Leverage Ratio (SLR), part of broader efforts to revise bank regulations, per Globe St. This rule, part of the Basel III reforms, was introduced in 2014 to ensure banks held enough capital. The plan goes beyond deregulation—it aims to influence Treasury markets..
Targeting Lower Yields
Officials hope that easing capital rules will free up cash. Banks could then buy more Treasuries, especially the 10-year note. Increased demand would raise prices and push yields down. Lower yields would reduce borrowing costs and support long-term investment.
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Understanding the SLR
The SLR requires major banks to hold between 3% and 5% in capital. This applies even to safe assets like Treasuries. Banks have long objected to the rule, arguing it discourages holding low-risk assets.
“Penalizing banks for holding Treasuries undermines their ability to support market liquidity during stress,” said Greg Baer, CEO of the Bank Policy Institute.
Fed Signals Openness to Change
Fed Chair Jerome Powell appears supportive. He noted in February that Treasury supply has outpaced banks’ capacity to hold it. One solution, he said, could be reducing how binding the SLR is.
Risks Remain
Loosening bank regulations and lowering capital requirements carries risk. The 2023 bank failures showed how quickly undercapitalized banks can fail when markets shift. Critics warn that relaxing rules could leave banks more exposed.
What’s Next
Regulators may propose changes to the SLR by summer. If approved, banks could redirect more capital into Treasuries—especially the 10-year note. This could ease financing costs for sectors like commercial real estate.
Why It Matters for CRE
Lower long-term rates can make borrowing cheaper. That’s a boost for real estate investors. But with less capital held in reserve, the financial system could become more fragile during downturns.
