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๐Ÿ“ˆ Macroeconomics

Since the introduction of the Supplementary Leverage Ratio in 2018, most of the top six U.S. bank holding companies have kept SLRs over the 5% mark.

However, recent trends show these ratios nearing the minimum 5% requirement, as total assets rise faster than Tier 1 capital.

r/Superstonk - Federal Reserve Alert! Since the introduction of the Supplementary Leverage Ratio in 2018, most of the top six U.S. bank holding companies have kept SLRs over the 5% mark. However, recent trends show these ratios nearing the minimum 5% requirement, as total assets rise faster than โ€ฆ
Source https://www.federalreserve.gov/econres/notes/feds-notes/dealers-treasury-market-intermediation-and-the-supplementary-leverage-ratio-20230803.html

Supplementary Leverage Ratio:

r/Superstonk - Federal Reserve Alert! Since the introduction of the Supplementary Leverage Ratio in 2018, most of the top six U.S. bank holding companies have kept SLRs over the 5% mark. However, recent trends show these ratios nearing the minimum 5% requirement, as total assets rise faster than โ€ฆ

Source: Board of Governors of the Federal Reserve System, Consolidated Financial Statements for Holding Companies (Form FR Y-9C)

Total Leverage Exposure:

r/Superstonk - Federal Reserve Alert! Since the introduction of the Supplementary Leverage Ratio in 2018, most of the top six U.S. bank holding companies have kept SLRs over the 5% mark. However, recent trends show these ratios nearing the minimum 5% requirement, as total assets rise faster than โ€ฆ

Note: Total leverage exposure is the sum of on-balance sheet exposures, derivatives transactions, repo-style transactions, and off-balance sheet exposures, with certain adjustments. Source: Federal Financial Institutions Examination Council, Regulatory Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (Form FFIEC 101)

Tier 1 Capital:

r/Superstonk - Federal Reserve Alert! Since the introduction of the Supplementary Leverage Ratio in 2018, most of the top six U.S. bank holding companies have kept SLRs over the 5% mark. However, recent trends show these ratios nearing the minimum 5% requirement, as total assets rise faster than โ€ฆ

Source: Federal Financial Institutions Examination Council, Regulatory Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (Form FFIEC 101)

Wut Mean?:

The six largest U.S. Treasury securities dealers are part of big U.S. bank holding companies (BHCs), which must maintain a supplementary leverage ratio (SLR) of at least 5%.

  • SLR is a capital requirement without risk adjustments and gauges a bank's core capital against its total assets.
  • Given its nature, activities like Treasury market intermediation that involve high volumes but low risk notably impact the SLR.

Since the SLR's introduction in 2018, most of the top six U.S. BHCs kept SLRs well over the 5% mark.

  • However, recent trends show these ratios nearing the minimum 5% requirement, as total assets rise faster than Tier 1 capital.

For some major BHCs with vast dealer operations, the SLR has, at times, indicated higher capital demands compared to risk-adjusted capital rules.

  • This might influence their participation in the Treasury market, especially during high-demand times.
  • Data reveals that Treasury securities at dealer subsidiaries constitute under 2% of the total assets, while Treasury-backed financing operations make up around 6%.

The proportion of total assets due to Treasury activities has been consistent over the years.

  • However, increased balance sheet sizes of BHCs could prompt dealers to limit their Treasury market actions due to SLR constraints.
  • A temporary exclusion period for Treasury securities from the total assets measure showed no significant impact on dealers' direct Treasury holdings or related financing activities.

Treasury Intermediation Is One of Many Factors Affecting Total Leverage Exposure:

r/Superstonk - Federal Reserve Alert! Since the introduction of the Supplementary Leverage Ratio in 2018, most of the top six U.S. bank holding companies have kept SLRs over the 5% mark. However, recent trends show these ratios nearing the minimum 5% requirement, as total assets rise faster than โ€ฆ

Wut Mean?:

  • The influence of Treasury market activities on bank holding companies' (BHCs) supplementary leverage ratios (SLRs) is explored through their contribution to total leverage exposure (TLE).

For the top six U.S. BHCs:

  • Reserves represent nearly 10% of their TLE.
  • Direct Treasury holdings are around 8%, a figure that has doubled since 2019.
  • Repo-style transactions constitute 13% of TLE, with roughly half estimated to be backed by Treasury securities.
  • The majority of TLE stems from non-Treasury activities, especially loan/lease financing (25%) and non-Treasury securities holdings (13%).
  • The decline in SLRs, especially post-2019, primarily resulted from an expansion of BHC balance sheets across various assets, including loans and securities.
  • Temporarily excluding Treasury assets and reserves from TLE caused SLRs to rise between April 2020 and March 2021, even as banks increased their holdings in these assets.
  • Post-March 2021, reintroducing Treasury holdings and reserves mainly drove the growth in TLE and a decrease in SLR.
  • In the future, as the Federal Reserve downsizes its balance sheet, reserve contributions to TLE may decline. However, a growing demand for Treasury intermediation, due to rising privately-held Treasury securities, may increase the role of Treasury market activities in TLE.

Dealers' Treasury Positions Make Only Modest Contributions to the SLR:

r/Superstonk - Federal Reserve Alert! Since the introduction of the Supplementary Leverage Ratio in 2018, most of the top six U.S. bank holding companies have kept SLRs over the 5% mark. However, recent trends show these ratios nearing the minimum 5% requirement, as total assets rise faster than โ€ฆ
r/Superstonk - Federal Reserve Alert! Since the introduction of the Supplementary Leverage Ratio in 2018, most of the top six U.S. bank holding companies have kept SLRs over the 5% mark. However, recent trends show these ratios nearing the minimum 5% requirement, as total assets rise faster than โ€ฆ
r/Superstonk - Federal Reserve Alert! Since the introduction of the Supplementary Leverage Ratio in 2018, most of the top six U.S. bank holding companies have kept SLRs over the 5% mark. However, recent trends show these ratios nearing the minimum 5% requirement, as total assets rise faster than โ€ฆ

Wut Mean?:

  • Dealers' Treasury securities holdings and financing activities only account for a minor part of the total leverage exposure (TLE), but their nature may make them more sensitive to the supplementary leverage ratio (SLR) compared to other banking activities.
  • Dealers offer immediate transactions in the Treasury securities market by adapting their long and short Treasury positions based on client demands.
  • Balance sheet data shows that securities holdings for trading (likely at the dealer level) have remained fairly constant since 2019. In contrast, other Treasury holdings, which are likely held by depository institutions (DIs) for investment, have doubled.
  • Trading-held Treasuries make up about a quarter of all Treasury holdings, implying that dealer Treasury holdings contribute roughly 2% to the TLE.
  • More detailed data reveals that the majority of Treasury securities are kept outside the dealer subsidiary. On average, dealers hold around 22% of the long Treasury positions, a share that has decreased significantly since 2016.
  • The range of contributions from dealers' Treasury holdings to the TLE varies, with an average close to 2%.
  • The role of dealer Treasury market intermediation in the SLR is limited, even though it's a key component of their activity in the Treasury market.
  • Apart from market making, a significant portion of a dealer's activity involves offering financing to clients via secured financing transactions (SFTs). The impact of these Treasury SFTs on the SLR is explored further.
r/Superstonk - Federal Reserve Alert! Since the introduction of the Supplementary Leverage Ratio in 2018, most of the top six U.S. bank holding companies have kept SLRs over the 5% mark. However, recent trends show these ratios nearing the minimum 5% requirement, as total assets rise faster than โ€ฆ

Wut Mean?:

Repo style transactions, or Secured Financing Transactions (SFTs), make up roughly 13% of large Bank Holding Companies' (BHCs) Total Leverage Exposure (TLE).

  • SFTs are vital for the functioning of the Treasury market. They enable banks to borrow/lend funds using Treasuries as collateral and help source/distribute Treasury securities.
  • The effect of SFTs on TLE is somewhat offset by balance sheet netting, allowing certain offsets between reverse repo receivables and repo payables.
  • Detailed data from FR 2052a shows that about half of all SFTs at the BHC level are backed by Treasury securities.
  • On average, nearly 90% of Treasury SFT activities come from the dealer level compared to the total BHC level, with most of this activity concentrated in dealer subsidiaries. This shows dealers play a pivotal role in BHCs' SFT activities.
  • Combining these data, dealers' Treasury-backed SFTs contribute roughly 6% to the total TLE, a proportion that has remained relatively stable over the years.
r/Superstonk - Federal Reserve Alert! Since the introduction of the Supplementary Leverage Ratio in 2018, most of the top six U.S. bank holding companies have kept SLRs over the 5% mark. However, recent trends show these ratios nearing the minimum 5% requirement, as total assets rise faster than โ€ฆ

Wut Mean?:

  • While dealers' Treasury operations only have a modest impact on Total Leverage Exposure (TLE), there were concerns that increasing BHC balance sheets could limit their Treasury operations, especially during the initial outbreak of the pandemic.
  • This worry arose when bank balance sheets expanded due to rising reserve levels and massive selling of Treasuries in March 2020. As a result, to alleviate potential strains on the Treasury market, the Fed temporarily adjusted the SLR rule from April 1, 2020, to March 31, 2021, to exclude reserve and Treasury holdings from its calculation.
  • Using the FR 2052a data, the behavior of the major six dealers in the Treasury market during this SLR exemption period was analyzed. Most of the banks' intermediation activities happen at the dealer level.
  • Figures 10 and 11 indicated that most of the dealers' Treasury positions and Secured Financing Transactions (SFTs) are encumbered, meaning they are financed via another SFT, which typically increases the size of banks' balance sheets and could decrease their SLR.
  • During the SLR exemption period, neither dealers' Treasury positions nor their SFT activities saw significant changes.

TLDRS:

  • Imagine there is a rule that limits the amount of money banks can borrow based on their assets as a see-saw (more on this in a moment).

This rule got adjusted for a short time in 2020 because of the pandemic.

  • People thought that this might make the big banks behave differently, especially in their dealings with government bonds.
  • They show, even with the rule change, the big banks did not act any differently than before.
  • However, recent trends show these ratios nearing the minimum 5% requirement, as total assets rise faster than Tier 1 capital.

Think of that see-saw from before--on one side, there is a pile of gold bars representing a bank's main money (Tier 1 capital). On the other side, there is all the things the bank owns (total assets/cat shit wrapped in dog shit).

r/Superstonk - Federal Reserve Alert! Since the introduction of the Supplementary Leverage Ratio in 2018, most of the top six U.S. bank holding companies have kept SLRs over the 5% mark. However, recent trends show these ratios nearing the minimum 5% requirement, as total assets rise faster than โ€ฆ

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