Board of Governors of the Federal Reserve System

I support the final rule because the leverage ratio should not be the binding constraint on banks in the ordinary course of managing their balance sheets. Such a constraint incentivizes higher risk behavior for no good reason. However, I am concerned that the Board and our interagency colleagues are missing an opportunity to make a more lasting and thoughtful change to the calibration of the leverage ratio by excluding Treasurys and U.S. central bank reserves from the supplementary leverage ratio denominator.

I think such an exclusion warrants consideration for at least three reasons. First, our current regulatory framework governing liquidity requires banks to hold these instruments as high quality liquid assets to cover potential outflows. It is unreasonable to impose such a requirement and then penalize these holdings by requiring that capital be held against them through the leverage capital requirements. These instruments are appropriately treated as being riskless in our risk-based capital requirements and should be afforded consistent treatment in our leverage capital requirements, including the supplementary leverage ratio.

Second, dealer intermediation of the Treasury market can suffer if banks are forced to hold capital just to support their Treasury and repo trading books, which often are low-return, low-risk, high volume activities that are critical for Treasury market liquidity and preserving market infrastructure. This can have meaningful consequences for the fiscal authority's ability to access the capital markets at the best prices for taxpayers, particularly if market volatility mounts.

Third, removing these securities from the supplementary leverage ratio would also help insulate the Treasury market from stressful episodes, as well as key dates when liquidity is in short supply. Instead of being forced to react to Treasury market dysfunction after it has occurred, excluding those assets prior to such a stress is a small price to pay to discourage that potential dysfunction. It also has the benefit of establishing transparent rules of the road that cannot later be mistaken for bailing out specific investors for bad decisions.

As we undertake further adjustments to the regulatory framework, I think we should keep our attention on this issue to make sure that the change made today was sufficient.