$5.5TN In Balance Sheet Capacity Unlocked: Assessing The Impact Of SLR Changes For Big Banks

On June 25th, the Federal Reserve announced changes to the supplementary leverage ratio (SLR) that aims to ensure that leverage is a capital backstop for the banking industry, as opposed to the binding constraint. According to an analysis from Goldman's bank analyst Richard Ramsden (available here for pro subs), the bank believes that the changes to the SLR calculation should increase the availability (and potentially lower the cost) of short-term, secured financing for market participants, improving liquidity in financial markets and the US treasury (UST) market in particular.

As expected, Ramsden predicts that the proposed changes will be "somewhat beneficial for banks", as it will give the industry more flexibility to provide short-term secured financing to market participants and potentially buy more UST (especially during periods of stress), although repo financing tends to be a relatively low ROE activity (given its low risk profile) and is unlikely to generate significant near-term earnings.