U.S. Bank Stockpile Liquidity Ratio Exemption for Treasuries Sparks Response from Arthur Hayes
Fresh Take:
In a surprising move, U.S. bank regulators aim to liberate Treasuries from the Supplementary Leverage Ratio (SLR), stirring a whirlwind of conversations in the financial world. And one voice stands out from the crowd—Arthur Hayes, a prominent figure in crypto and macro finance. Hayes weaves a grim picture, suggesting this seemingly technical change could signal deeper systemic pressures.
Bank regulators seek to adjust the SLR to give banks more leeway in dealing with Treasuries, potentially boosting mobility in a $29 trillion market. The modifications aren’t about abolishing Treasuries from the equation entirely, but rather reducing the SLR by up to 1.5 percentage points, gutting capital buffer requirements for big U.S. banks.
Arthur Hayes views this as more than just a cash-releasing measure – it's a flashing red light for systemic stresses and strains within the U.S. economy. According to him, it's a sign that the U.S. government is struggling to find buyers for its debt, a problem exacerbated by banks and foreign governments losing interest.
What the Treasury Exemption Means for Banks
The SLR has been in place since post-2008 crisis days, mandating banks to hold a specified amount of equity against total assets and encompassing riskless assets like Treasuries within that threshold. The forthcoming modifications aim to dilute that hold-back potential, empowering banks of all sizes to lighten their capital obligations while juggling Treasuries.
The move could aid liquidity in the Treasury market, but there's no guarantee that banks will jump headfirst into the fray. Arthur Hayes warns that capitulating regulatory pressure without addressing the core issue – ballooning debt and waning demand – could drive banks to take on riskier ventures instead of keeping safe assets in their stash.
Regulators' Moving Target: A Cautionary Tale?
Champions of the move argue it will smooth out Treasury auctions, tighten spreads, and generate predictable pricing. They look at past crises like March 2020, where capital regulations hampered banks' abilities to lend a hand during crisis times. However, Hayes and other skeptics caution that the reform may fuel balance sheet expansion without sufficient capital reserves as a safety net.
This, in turn, could make the financial system more brittle and leveraged over time. Hayes shakes his head and declares this isn't stability; it's disguised financial repression.
The Endangered SLR: Losing its Bite?
By partially excusing Treasuries, the SLR might lose its bite. According to Hayes, this could open the door to broader concessions in the name of short-term liquidity needs, gradually eroding capital rules and raising questions about what other assets may meet the chopping block next.
This slippery slope could blur the lines between politics and regulations, transforming capital rules into political weapons instead of neutral risk moderators. In the long run, Arthur Hayes sees this as a critical juncture – not just for banking policy, but for the integrity of monetary credibility. If safeguards bend every time debt becomes uncomfortable, what boundaries remain?
A Warning Signal: Not a Game-Changer?
While traditional finance players embrace the rule tweak as a modernization step, Arthur Hayes sees it as a harbinger of a precarious future. Whether the end-of-year Treasury trading bounces back or signals the birth of a genuine crisis depends on how banks respond, whether regulators maintain their course, and whether capital buffers still mean something in the SLR's loosened regime.
For now, one thing remains crystal clear – the Treasury exemption has sparked an unstoppable conversation about how far the financial system can stretch before it snaps.
- Arthur Hayes, renowned in crypto and macro finance, warns that the U.S. Treasury exemption from the Supplementary Leverage Ratio could be a flashing red light for systemic stresses within the economy, indicating a possible struggle to find buyers for U.S. debt.
- The modifications to the SLR aim to dilute the hold-back potential, giving banks of all sizes increased leeway to manage Treasuries, a change that could boost liquidity in the $29 trillion market.
- However, Hayes cautions that capitulating regulatory pressure without addressing the core issue – ballooning debt and waning demand – could lead banks to take on riskier ventures instead of maintaining safe assets.
- In the long run, Hayes sees the potential weakening of the SLR as a critical juncture for banking policy, questioning the integrity of monetary credibility if safeguards bend every time debt becomes uncomfortable.
- The Treasury exemption has ignited a heated conversation about the limits of the financial system, with traditional finance players hailing it as a modernization step while Hayes views it as a harbinger of a precarious future.
