Bessent Is Wrong About Banks Saving Treasuries

(Bloomberg Opinion) -- When senior politicians start talking about technicalities of obscure financial regulations on mainstream TV you can be sure something is up. Treasury Secretary Scott Bessent did just that in the middle of the US bond market selloff last Wednesday, a few hours before President Trump postponed most of his Liberation Day tariffs.

Bessent was talking to Maria Bartiromo on Fox Business Wednesday morning when he bought up plans for deregulation, claiming they’d be very powerful. “Part of the deregulation that’s coming in the banking industry will be changing what’s called the Supplementary Leverage Ratio, which will allow banks to buy more Treasuries without a big capital charge,” he said. “So I would expect that we will have created a new buyer for Treasury securities, a larger more durable buyer.”

There’s a bit to unpack there, but the first big flag is the treasury secretary seemed to be saying the government plans to fiddle banking rules to create demand for US debt. On daytime TV. In the middle of a selloff. That’s not a good look and it didn’t help. Long-term yields surged over the week, leading some to say US debt is behaving like a risky asset. 

The last time the US took Treasuries out of the leverage measure for banks was in 2020 when global markets were in meltdown. While it sounded as if Bessent was making an emergency move, he’s previously floated this regulatory tweak. In early March, he said the leverage ratio meant “the safest asset in the country [was] not treated as such when leverage restriction is applied.” He didn’t announce specific plans to the Economic Club of New York that day, but he raised expectations.

The Supplementary Leverage Ratio isn’t the main measure of how strong or safe banks are – that’s the risk-based capital ratio that you might be more familiar with. The SLR is a kind of backstop, which looks at how much capital a bank has in comparison to a plain measure of its assets. This treats government debt as equivalent to credit card loans. It’s meant to be an extra guardrail behind the main capital ratio, but it can end up constraining banks in a way that wasn’t really intended when there are a lot of very safe assets or huge amounts of cash in the financial system.

Plenty of people think reforming the SLR is a good idea – but not because it means America’s banks will suddenly load up on the country’s debt. In fact, even when markets are less volatile they might take a cautious view on holding Treasuries. Instead, the main rationale to revise the ratio is to give banks more capacity to handle large trading flows and protect the functioning of the Treasury market, especially when big hedge funds lead a selloff.

“If highly levered entities such as hedge funds decide to unwind their positions, regulatory requirements may limit the market making capabilities of dealers to facilitate this activity,” as Beth Hammack, president of the Cleveland Fed and former Goldman Sachs Group Inc. banker, put it in a February speech.

But would reform encourage banks to load up on Treasuries regardless? The simple view is that if banks can clip coupons from assets that require no capital, then surely they’d do that all day long. Maybe, but there are dangers in holding too many Treasuries as well, especially when the market is volatile.During first-quarter results calls on Friday, executives from JPMorgan Chase & Co. and Wells Fargo & Co. said SLR reforms could help market liquidity but might not do much for bank holdings. Jamie Dimon, JPMorgan chief executive officer, said the effect might be different for different kinds of banks, but added: 'I don't think that it's going to change our ownership of Treasuries.'

For large US banks, if they categorize the bonds as “available for sale” in their accounts, then any fall in prices passes straight through into a loss of capital in their financial results (through what’s known as accumulated other comprehensive income).

But if the banks book their Treasuries as “hold to maturity,” then price falls sit on their balance sheets as unrealized losses. Mostly that doesn’t matter, but during 2023 when US rates rose sharply it really did matter. Big unrealized losses are what sparked the demise of Silicon Valley Bank and led to lots of questions (misplaced in my view) about the scale of Treasury losses at Bank of America Corp.

Banks might buy lots more Treasuries if they really believe interest rates are set for a long-term decline, but if they expect unpredictable or rising rates, they would likely not. When Bessent was talking about banks being larger, more durable buyers, he was contrasting them with hedge funds that are often seen as more sensitive to price and volatility. But big banks will care about those factors, too.

The $29 trillion Treasury market does need protecting because it is the foundation of the vast shadow banking system that is now so much more important to the financing of the wider economy. Bessent’s real problem will be if the administration succeeds in remaking global trade and slashing America’s deficit. Then there will be fewer foreign buyers with dollars to recycle back into the US. Changing the SLR alone isn’t going to cover that shortfall. More from Bloomberg Opinion:

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

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