BPInsights: May 17, 2025 - Bank Policy Institute

An Urgent Fix Awaits as Lawmakers Flag Treasury Market Concerns

Fixing leverage capital requirements, particularly the supplementary leverage ratio and tier 1 leverage ratios, has emerged as an urgent solution to fragility in the Treasury market. The House Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity held a hearing this week to examine Treasury market fragility following heightened volatility last month. Senior policymakers, including Treasury Secretary Scott Bessent, have flagged SLR reform as a priority in the coming months. The SLR is meant to serve as a backstop, not a binding constraint, and against a backdrop of increased Treasury issuance, it has impeded banks’ incentives to intermediate in the crucial Treasury market.

Intermediation incentive: Task Force Chair Frank Lucas (R-OK) reiterated calls to exempt Treasuries and reserves from the SLR. “We should incentivize participation in the market, not make it cost-prohibitive,” he said. “The Treasury market has doubled in size since I was on the Dodd-Frank conference committee. We should reconsider some of the provisions enacted that may have had adverse consequences and that disincentivize participation in financing our debt.”
Bipartisan attention: Democratic lawmakers also drew attention to the SLR and its role in the Treasury market. “The leverage capital requirements are insensitive to the fact that the Treasuries are risk-free as far as credit risk,” said Rep. Brad Sherman (D-CA) as he asked witness Nate Wuerffel of BNY about the consequences of a less liquid Treasury market.
Bottom line: In response to Rep. Scott Fitzgerald (R-WI), Wuerffel underlined the key issue with leverage ratios: Leverage ratios such as the SLR were “designed as a backstop to guard against risks, but today it serves as, in some cases, the first line of defense, and it constrains banks from intermediating, especially in times of stress.” He added that “having a targeted adjustment to the SLR as well as the tier 1 leverage ratio could help boost capacity in those times of stress.”
BPI statement for the record: BPI submitted a statement for the record for the hearing, emphasizing the Treasury market liquidity benefits of adjusting key leverage ratios and citing previous work on leverage ratio reform.
‘Deterioration’, but not ‘dysfunction’: Roberto Perli, manager of the Fed’s System Open Market Account, assessed the Treasury market’s recent turmoil in a speech late last week at a Fed funding markets conference. He referred to “deterioration” in the Treasury market in early April that did not rise to the level of “dysfunction” seen in the COVID dash-for-cash. “The Treasury market behavior in the first couple of weeks of April was unnerving, but it was nowhere close to what happened in March 2020,” Perli said. He emphasized the intersection of monetary policy implementation, funding and liquidity and the Treasury market, and previewed improvements in one of the Fed’s key levers for stabilizing markets when liquidity tightens: morning auctions for the standing repo facility. “These early-settlement auctions, combined with the current afternoon auctions, will enhance the effectiveness of the SRF as a tool for monetary policy implementation and market functioning.” The Fed will continue to look for ways to improve this tool’s efficacy, he said.

Five Key Things

1. Treasury’s Faulkender Calls for Reform to Supervision, Capital, Liquidity

U.S. Deputy Treasury Secretary Michael Faulkender expressed support for several reforms to the bank regulatory framework in remarks this week. At a high level, he outlined the administration’s view on regulatory accountability, guiding principles underpinning its actions and the steps Treasury is taking to play a larger role in bank regulation. The guiding principles included the need for regulation to derive from a clear statutory mandate, the necessity of evaluating and balancing costs and benefits and the importance of transparency in regulatory agencies.

Supervision: Faulkender reiterated Treasury’s call to refocus supervision on material financial risks and said the supervision of Silicon Valley Bank is an example of how examination culture has gone astray. Concrete steps under consideration in pursuit of that goal include defining “unsafe and unsound” banking practices by rule, and creating a “more realistic process for appealing supervisory findings.” “It should no longer be the case that policymakers are denied access to CSI,” Faulkender said.
Capital: Faulkender expressed concern about the migration of financial activity out of the banking system due in part to capital regulation. He offered insights into efforts to modernize the capital framework. “To the extent that the Basel Committee’s Endgame standards can provide inspiration, we could borrow selectively from them,” he said. “But this should only be done to the extent that we can independently validate the underlying rationale and then make that rationale available for public comment.” Policymakers will also examine the stress capital buffer framework, which should be “consistent with the law and otherwise provide appropriate transparency and opportunity for comment,” he said. He reiterated concern that the supplementary leverage ratio has risked becoming a binding constraint instead of a backstop as intended. “The result is that the safest asset in the country, U.S. Treasury bills, may not trade as effectively as they could when the leverage restriction is applied. Bank regulators are now hard at work to develop a proposal on this important issue.”
Liquidity: Faulkender called for policymakers to find opportunities to expand the role of loans as collateral for funding during stress periods and “thereby help banks get back into the business of lending.” He said policymakers will revisit the role of the discount window and FHLBs, “including whether there are opportunities to clarify the role of these funding sources in internal liquidity stress testing and the supervision of banks’ contingency funding plans.” Treasury’s assessment will consider if examiners have developed a bias toward reserves over other liquidity sources and “how we can better ensure that liquidity buffers are indeed buffers, not regulatory minimums, that banks can draw down during a period of stress.”

2. Trades: Stress Test Proposal Aims to Reduce Uncertainty, But Risks Exacerbating It

The Fed’s proposal to change the calculation of the stress capital buffer could undermine its own goal of decreasing uncertainty in the stress testing cycle, BPI, the Financial Services Forum, the American Bankers Association and SIFMA wrote in a letter on Friday. The proposal would use the average of the maximum common equity tier 1 capital declines in the previous two years’ stress tests to inform each bank’s stress capital buffer requirement.

Timing pressure: Comments are due on the proposal on June 23, 2025, a week before the Fed must notify banks of their preliminary stress capital buffer requirement. Banks will only have two business days after that notification to adjust their plans to distribute capital to shareholders. “Presumably, this preliminary SCB requirement would be based on the current rule’s calculation methodology,” the letter states. “If amendments to the SCB requirement methodology become effective after June 30, 2025 … a firm’s final SCB requirement (potentially based on a new methodology) could be materially different than its preliminary amount.” A similar problem would arise if the Fed adopted a final rule with an effective date after Oct. 1, 2025 but before Oct. 1, 2026.
Solution: The trades urged the Fed to announce, no later than 14 calendar days before the scheduled 2025 stress test results announcement date, that banks can operate under the existing SCB framework through Sept. 30, 2026 regardless of whether the Fed eventually adopts a final rule changing the calculation going into effect in the interim. “This approach would provide the FRB with flexibility to adopt the Proposal as a final rule in an orderly manner at a future date while providing firms and investors with confidence that, at a minimum, the existing SCB methodology will remain an available methodology through September 30, 2026.”

3. House Hearing Considers Reauthorization of Cyber Measure

The House Committee on Homeland Security’s Cybersecurity and Infrastructure Protection Subcommittee held a hearing on Thursday to consider the reauthorization of a key cybersecurity protection law. The legislation, known as the Cybersecurity Information Sharing Act of 2015, enables banks and other critical infrastructure firms to share timely information with the government and each other to identify and safeguard against cyber threats. BPI has expressed support for reauthorizing this measure – “letting it lapse could make America’s financial system more vulnerable to emerging cyber risks,” Head of BITS Heather Hogsett said in a recent statement in response to Senate introduction of a reauthorization bill. CISA 2015 will expire in September unless Congress takes action.

‘More vital than ever’: Subcommittee Chair Andrew Garbarino (R-NY) emphasized the necessity of the law in the current threat environment. “By providing liability and privacy protections for information shared in accordance with the statute, CISA 2015 removed longstanding barriers to public-private collaboration in cybersecurity,” Garbarino said at the hearing. “Over the past decade, the threat landscape has evolved significantly, with sophisticated nation-state and criminal actors increasingly exploiting cyberspace to target infrastructure and individuals. As these threats continue to rise, CISA 2015 has become more vital than ever.”
Necessary protections: CISA 2015 promotes information sharing between the private and public sectors that is vital to combating threats by granting legal and liability protections; without the Act in place, these protections would lapse and the essential information-sharing flow would be disrupted, said Northern Trust Chief Information Security Officer Karl Schimmeck, who testified on behalf of SIFMA.
Consistent feedback: There has been a consistent call from a range of stakeholders to reauthorize the legislation, lawmakers said. “On the issue of reauthorizing CISA 2015, I’ve received a very clear message from every from everyone I’ve talked to: do not let it lapse,” Ranking Member Eric Swalwell (D-CA) said. “Stakeholders have consistently stated that CISA 2015 has drastically improved public-private collaboration, helping our cyber defenders better do their job.”

4. CFPB Withdraws, Rescinds Multiple Measures

The CFPB this week withdrew and rescinded several regulatory measures enacted under the previous director, Rohit Chopra. The actions included:

Closing its “repeat offender” registry of firms.
Rescinding a proposed interpretive rule on the Electronic Fund Transfer Act, raising questions about whether the proposal had properly interpreted the statute in question.
Proposing to rescind changes made under former Director Chopra to the CFPB’s (i) supervisory designation proceedings and (ii) rules of adjudication.
Withdrawing a proposal on prohibited terms and conditions in agreements for consumer financial products or services, noting it had received comments arguing that the Bureau lacks authority to adopt the proposed rule.
Rescinding an interpretive rule that gave state attorneys general a broad scope to bring legal actions against firms for consumer law violations.

5. House Panel Examines Bank M&A

The House Financial Services Committee’s Subcommittee on Financial Institutions held a hearing this week on bank mergers and de novo bank formation. Witnesses included community bankers, a banking attorney and a representative from the Competitive Enterprise Institute. Lawmakers at the hearing decried delays, inefficiencies and barriers in the bank M&A process. “The current system for reviewing bank mergers is too slow, too uncertain and too costly,” Rep. Andy Barr (R-KY) said. Barr noted his bill to put a “shot clock” on the M&A process, which has been plagued in recent years with long and uncertain timelines. The hearing also focused on the formation of new banks in the U.S. and regulatory constraints on smaller banks.

Lifeline to growth: For many smaller and midsize banks, “mergers are a way to stay viable in a complex and costly regulatory environment,” Rep. Roger Williams (R-GA) said at the hearing. “These banks often look to combine resources in order to invest in technology, expand product offerings, and better serve their customers.”
Recent reversal: Rep. Barry Loudermilk (R-GA) noted the OCC’s recent reversal of a policy that exacerbated delays and uncertainty in bank merger applications.
Learn more about M&A: The bank merger review process has been fraught for years with subjective standards, opacity and delays, but signs of life are emerging; still, more work remains to be done to improve the policy framework. Read more in BPI’s recent post here.

In Case You Missed It

The Crypto Ledger

Here’s the latest in crypto.

Senate prospects: Negotiators are working to find agreement on several outstanding issues on Senate stablecoin legislation, known as the GENIUS Act, according to POLITICO. The bill failed to advance in a crucial procedural vote last week. If and when the legislation passes the Senate, it would move to the House, where lawmakers on the House Financial Services Committee have authored their own stablecoin legislation, known as the STABLE Act, and are drafting market structure legislation. White House aide Bo Hines expressed optimism that the President would sign stablecoin and market structure legislation into law before the August congressional recess.
Coinbase attacked: Coinbase this week said it had experienced a ransomware attack and has refused to pay $20 million in ransom demanded by hackers who bribed overseas customer support agents to steal Coinbase user data. The incident was estimated to cost $180 million to $400 million. Separately, Coinbase disclosed that it is subject to an SEC investigation over whether the firm misstated its number of users.
Changes ahead for SEC rule: An SEC policy enabling brokers to custody digital assets may need to be repealed and replaced, said SEC Chair Paul Atkins this week. Low uptake in the “special-purpose broker dealer” framework reflects “significant limitations” imposed during the last administration, Atkins suggested.
Celsius’ Mashinsky sentenced: Former Celsius Network chief Alex Mashinsky was sentenced late last week to 12 years in prison, according to the Wall Street Journal. Mashinsky pleaded guilty to fraud connected to the crypto firm’s collapse.

Traversing the Pond: What’s New in International Banking Policy

Here’s the latest in global banking policy.

Capital: An ECB task force will propose “capital neutral” changes to bank regulation, including the EU’s implementation of the final package of Basel reforms, by the end of the year, according to Bloomberg this week. The news comes as European regulators are aiming to simplify regulation.
Climate: The Basel Committee on Banking Supervision will publish a voluntary Pillar 3 climate risk disclosure framework for different jurisdictions to consider. The BCBS proposed a Pillar 3 climate risk disclosure framework early last year, which strongly resembled the EU’s framework. Even voluntary climate risk disclosure frameworks can have important implications for cross-border banks. The BCBS also said it will prioritize work on physical risk – extreme weather events – going forward. The climate risk developments came out of a meeting of the Basel Committee’s Group of Central Bank Governors and Heads of Supervision this week.
U.S. and EU on AI: The U.S. called on the EU in a letter to pause implementation of the AI Act, legislation on the use of artificial intelligence. The U.S. called for changes to the legislation to ensure a level playing field and enable innovation.
Resolution consultation: The Single Resolution Board recently launched a consultation seeking public input on valuation requirements in bank resolution. The valuation requirements are quite extensive, appear to lack cost-benefit analysis and would address extreme “tail-end scenarios.”

POLITICO Pro Q&A with Citi’s Brent McIntosh

POLITICO Pro’s Sam Sutton discussed capital requirements, account closures and other topical bank policy issues with Citi Chief Legal Officer Brent McIntosh in a recent Q&A interview. Read it here.