Bessent Reiterates Call for Adjusting Leverage Ratio
Treasury Secretary Scott Bessent this week repeated his recent call for adjustments to the supplementary leverage ratio, which acts as a constraint on banks’ balance sheets and exacerbates Treasury market liquidity pressures. He suggested taking Treasuries out of the SLR calculation. Leverage ratios treat all assets as equally risky, as opposed to risk-based capital measures, and can discourage banks from intermediating in the Treasury market. “There’s a capital charge to banks for buying Treasury bills,” Bessent said in a podcast interview. “So I actually think there’s a chance that if we take — it’s called the supplementary leverage ratio — if we take that away, … we might actually pull Treasury bill yields down by 30 to 70 basis points. Every basis point is a billion dollars a year.” He also urged, more generally, unlocking economic growth through regulatory changes, referring to a financial “corset” on the U.S. economy that stifles growth. Bessent echoed these remarks in a speech to the Financial Stability Oversight Council this week, where he also called for a refocus in supervision.
Five Key Things
1. Bowman Nominated as Fed Supervision Chief
This week, President Trump nominated Federal Reserve Governor Michelle “Miki” Bowman to serve as the Vice Chair for Supervision at the central bank. The official nomination follows media reports last week that Bowman had been selected for the role. Bowman expressed gratitude for the nomination in a statement on Monday. “If confirmed, I will promote a safe and sound banking system through a pragmatic approach to supervision and regulation with a transparent and tailored bank regulatory framework that encourages innovation,” Bowman said. “I will leverage my hands-on experience as a banker, a bank regulator, and a Board Member to address the challenges ahead.” If confirmed by the Senate, Bowman, a former community banker and longtime advocate of regulatory tailoring, would succeed Michael Barr, who stepped down from the post at the end of February.
2. From Floor to Ceiling: ECB Encourages Banks to Tap Central Bank Liquidity
The European Central Bank this week encouraged banks to borrow from its facilities regularly to meet their liquidity needs, as the ECB moves from an ample-reserve “floor” framework to a “ceiling” system where it undersupplies reserves. The new system requires bank borrowing from the ECB’s weekly refinancing operations to make up the aggregate shortfall. Top ECB officials Isabel Schnabel and Claudia Buch emphasized that supervisors and bank investors should view such borrowing as a normal part of day-to-day liquidity management.
- The new era: This message resembles how the Bank of England recently framed its changing reserves framework and new lending operations. The central banks are trying to reduce stigma historically associated with central bank borrowing.
- Open questions: The success of the transition hinges on banks’ willingness to borrow. It remains to be seen if banks will be persuaded to use these facilities in their day-to-day liquidity management, but clear encouragement from central bankers is a first step; another necessary step is for supervisors to recognize central bank borrowing capacity as a liquidity source in bank assessments. It’s not explicitly clear from the ECB’s release that such capacity will be recognized in banks’ liquidity evaluations.
- Following suit: The ECB and Bank of England have both announced moves to a ceiling system of reserves and adjusted their expectations around bank borrowing accordingly – will the Federal Reserve follow suit? It is not yet clear.
3. BPI Responds to OCC’s Decision to Cease Examinations for Reputation Risk
BPI issued the following statement this week on the OCC’s announcement that it would discontinue examining its regulated institutions for reputation risk: “We support the OCC’s announcement and believe it is one action among many necessary steps to restore fairness to bank supervision. Bank exams should be transparent and grounded in objective legal standards. This marks meaningful progress in refocusing oversight on material financial risk, rather than reputational risk, operational risk, corporate governance, vendor management and other matters that do not pose a material threat to safety and soundness.”
4. Banks and Business Groups Press for Transparency in Flawed Stress Testing Framework
The Bank Policy Institute, alongside the American Bankers Association, the U.S. Chamber of Commerce, the Ohio Bankers League and the Ohio Chamber of Commerce filed an opening brief on Friday challenging opaque aspects of the Federal Reserve’s stress testing framework for bank capital.
What We’re Saying:
The groups argue that the Federal Reserve’s decisions concerning the stress tests can result in increased borrowing costs, hindering banks’ ability to support the economy:
“The substantive choices underlying these tests’ methodology are among the most consequential policy decisions made by any agency in the federal government, requiring banks to hold hundreds of billions of dollars in capital as protection against a potential economic downturn. When calibrated properly, capital requirements help ensure the safety and soundness of the financial system. But if capital requirements are set too high, or are subject to unpredictable year-to-year volatility, they force banks to withhold too much liquidity from the economy, resulting in higher lending costs and slower growth for the economy as a whole.”
The challenge also highlights how the opaque nature of this framework violates the Administrative Procedure Act by excluding public input and transparency:
“Currently the Board makes these enormously important policy decisions through a secretive process that eschews the disclosure and public participation required by the Administrative Procedure Act and other fundamental principles of administrative law and democratic government. …By refusing to put its stress-test models and scenarios through public notice and comment — and refusing to fully disclose the models at any point — the Board violates the APA, infringes on the public’s right to participate in rulemaking and hobbles its own decisionmaking by depriving itself of the benefit of the public’s input.”
What’s Next:
- March 21, 2025: Plaintiff trade associations filed a motion for summary judgment.
- April 29, 2025: The Federal Reserve files its opposition brief and cross-motion for summary judgment.
- May 27, 2025: The plaintiff trade associations file a consolidated opposition and reply brief.
- June 17, 2025: The Federal Reserve files its reply brief.
- Plaintiffs have requested that the Court enter a final decision on the merits by October 31, 2025.
5. Former Fed Official Quarles on Regulation, Supervision
Former Federal Reserve Vice Chair for Supervision Randy Quarles weighed in on topics driving recent news in bank regulation and supervision during a Bloomberg podcast interview aired this week. The interview on The Big Take DC with Bloomberg’s Saleha Mohsin covered topics including fiscal policy, current news at the Treasury Department and the nature of bank regulation. Quarles addressed recent comments by Chair Jay Powell on the supervision position creating “volatility” at the central bank. On the existence of the permanent supervision position, Quarles said: “There are different ways that one could address the issue, but I think that is actually a good feature if you’re going to preserve the independence of the Fed system with respect to monetary policy, which I think is a sensible thing to preserve.” Other tasks in the Fed’s purview, including bank regulation, are “appropriately more subject to political influence, to political direction even, than monetary policy,” he said.
- Presidential history: The practice of U.S. presidents refraining from comment on monetary policy is “relatively recent,” Quarles said, though he noted the general consensus that monetary policy “should be … appropriately insulated from direct political control and the force of political influence.”
- Refining, not polarizing: Quarles espoused the notion of durable regulatory changes rather than swinging the pendulum back and forth between administrations. “A wise political system will not be constantly churning regulation from one pole to another, but should be regularly refining regulation,” he said. “A very reasonable program for any political administration is to improve the productive capacity of the economic infrastructure, and you can’t really be effective in doing that without affecting financial regulation.”
In Case You Missed It
EU Unveils Capital Markets Plan
The European Union this week unveiled a Savings and Investment Union strategy aimed at turning the Continent from a bank-loan-financed hub of savings to a revitalized center of capital markets financing.
- Global context: The action, long in the works, comes amid multiple dynamics: concerns about languid EU economic growth and over-regulation; competition with the U.S. and its capital markets; cultural preferences toward saving rather than investing in markets; and fragmentation between different EU economies that creates policy friction and barriers to cross-border investment. The European Commission framed the savings-investment apparatus as crucial connective tissue to link savings and investment needs, noting that Europe’s strategic objectives demand significant investment.
- Supervision: A unified capital markets integration will also entail a unified approach to supervision, according to a factsheet accompanying the release of the strategy. “The EU must ensure all market actors receive the same supervisory treatment regardless of location in the EU,” the factsheet said.
- Banking state of play: The strategy envisions robust capital markets financing alongside bank lending, and tactics such as embracing securitization will free up more bank balance sheet capacity. The EU plans to release a report in 2026 on the state of the European banking sector, including its competitiveness.
Fintechs Eye Banking Charters Under New Administration
Fintech interest in seeking bank charters is mounting significantly under the new administration, according to a Reuters article this week. Bank-like charters offer significant benefits to fintech firms, such as cheap funding through deposits and potentially lighter oversight than that of a full-fledged bank. The article suggested that the OCC’s conditional approval of fintech SmartBiz’s revamp to the business model of a community bank that it acquired may signal a more open posture for fintechs seeking banking system legitimacy, but the parent company became a bank holding company subject to full-fledged supervision so the situation differs from novel charters. Fintech presence in the banking system presents significant risks if not mitigated by the full, consolidated system of oversight that governs regulated banks.
BPI, Columbia Co-Host 9th Annual Conference on Bank Regulation
BPI and Columbia University’s School of International and Public Affairs co-hosted the ninth annual Conference on Bank Regulation on Feb. 27. The conference convened academics, regulators and industry practitioners to discuss recent research in bank regulation. Themes explored at the conference included interconnectedness between banks and nonbanks, the importance of monitoring and predicting run risk and the lessons learned from the 2023 bank failures. Read the highlights of the research and panel discussion from the conference here.
The Crypto Ledger
Here’s the latest in crypto.
- Presidential remarks: President Trump reiterated his support for crypto innovation in brief remarks this week at an industry conference. Trump said his administration is “ending the last administration’s regulatory war on crypto and bitcoin” and his call for Congress to pass legislation for stablecoin issuers.
- Master accounts: Rep. Bryan Steil (R-WI), head of the digital assets subcommittee on the House Financial Services Committee, discussed crypto legislation in a recent POLITICO Q&A. Steil was asked if he supports legislative language that would give nonbank stablecoin issuers Fed master account access. “That is something that is worth having a broader conversation on writ large to make sure that we hear what the stakeholders have to say on it,” Steil said. “I think our bill does not give that access.” Steil and other House lawmakers are working on legislation in parallel with the Senate to define regulatory standards for stablecoins and other digital assets. The Senate Banking Committee advanced a bill on that subject last week.
UK’s Reeves Unveils Plan to Reform Regulation
UK Chancellor of the Exchequer Rachel Reeves on Monday unveiled an action plan to dismantle duplicative regulations and jumpstart economic growth. The plan takes aim at unnecessary complexity, redundancy and risk aversion in regulatory policy. The goal is to foster UK economic competitiveness and to ensure the regulatory system supports growth, is targeted, proportionate, transparent and predictable and adapts to keep pace with innovation. The recent consolidation of the Payment Systems Regulator into the FCA is part of the strategy. The government is also aiming to modernize the FCA’s dispute resolution rules and examine whether the Financial Ombudsman Service is performing its role effectively. The action plan also outlined plans to launch a “concierge service” to help foreign financial firms navigate the UK regulatory landscape and broader barriers to entry.
Clearer Hindsight: Paper Offers Takeaways on 2023 Banking Turmoil
A new working paper by Yale University’s Steven Kelly and the Chicago Fed’s Jonathan Rose reviews the banking turmoil of 2023 “with the benefit of two years of hindsight,” highlighting seven facts that depart from the dominant narrative of the crisis. The researchers frame the episode as a reaction to crypto- and venture capital-centered bank business models that had come under pressure. “We argue this view of the crisis provides a more precise explanation of which banks were affected compared to an explanation focused solely on banks’ balance sheet metrics,” Kelly and Rose state. “We also argue that this view of the crisis has different policy implications, more focused on surveilling bank business models and institutional depositors.”
- Dissecting the ‘standard account’: Kelly and Rose question the “standard account” of what went wrong at Silicon Valley Bank and others that unraveled in spring 2023. The intense, sometimes exclusive, focus on SVB rather than other banks indicates a blind spot, they suggest. The standard account suggests that supervisory policies should adapt to a “new age in which banks are subject to social-media driven, sudden, and large withdrawals on all types of uninsured deposits.” But, the authors note, this narrative “leaves some puzzling gaps,” such as why Signature Bank failed next after SVB, why the crisis occurred in March 2023 despite unrealized losses having been elevated for several quarters prior and why some of the failed banks had extremely low insurance coverage.
- Seven key facts: The authors lay out seven facts to give more perspective to the events in spring 2023, including that Silvergate Bank was the first to experience a run; that bank business models focused on crypto and VC clients were at the center of the crisis; and that unrealized losses and uninsured deposits are “inadequate explanations of which banks experienced runs in 2023.” They also observe that “regional” banks is the wrong common denominator for the banks affected in 2023; instead, the most severely affected banks were “geographically clustered around the tech- and crypto-heavy West Coast.” The authors also dispute the notion that social media is responsible for exacerbating the bank runs.
- Policy implications: The authors suggest that the 2023 turmoil “supports a focus on institutional depositors rather than retail depositors and on the macroeconomic sensitivity of certain sectors’ deposit balances—but not much differentiation among institutional depositors once a run has begun.” The authors go on to say that “We do view the concentration of the failed banks’ deposits at crypto-asset and tech deposits as being an integral part of the crisis, but mostly because those deposits signified the broader business models of the banks as revolving around those sectors.” In supervision, the authors suggest that sector-specific business models, rather than social media, were the key variable to watch in the 2023 banking turmoil and “it is possible that supervisory practices might benefit from a more general application of business model analysis.” The authors also critique the conventional narrative that supervisors failed to pay enough attention to interest rate risk or uninsured deposits: “The challenge for this account is that these financial statement variables flagged large amounts of banks that did not come under severe pressure.” Kelly and Rose suggest that supervision rather than regulation could serve as a more precise monitoring tool for interest rate risk and discount window pre-positioning.
Sean Spicer to Join Old Glory Bank Board
Former White House Press Secretary Sean Spicer has been invited to join the board of directors of Old Glory Bank, a community bank focused on first responders, military members and a generally conservative customer base. Spicer is expected to join the bank’s board after regulatory approvals, according to a press release.
Upcoming Events
- 3/25/2025: House Financial Services Committee hearing on access to capital
- 3/26/2025: House Financial Services Subcommittee on National Security, Illicit Finance and International Financial Institutions hearing: Following the Money with FinCEN
- 3/26/2025: House Financial Services Subcommittee on Financial Institutions hearing on CFPB
- 3/27/2025: Senate Banking Committee nomination hearing for Paul Atkins (SEC), Jonathan Gould (OCC) and Luke Pettit (Treasury)
