On Friday morning, US Federal Reserve said in a statement that it would no longer extend a momentary regulatory break scheduled to be expired this month citing big US lenders had been flushing with fresh capitals, nonetheless, an expiration of that exemption would compound narratives for Wall Street lenders, since they would have to resume putting an extra layer of capital-buffer against US Treasuries and Central Bank deposits to soak up systemic risks.
On top of that, according to US Fed announcement published earlier in the day, a temporary change to SLR (Supplementary leverage ratio), which was inclined on May 15 last year in a bid to provide flexibility for banks to provide additional credit to US households and businesses in context of the pandemic outbreak, would expire as planned on March 31, 2021.
In point of fact, latest US Fed move to let leverage exemption rule expire as early as by March 31, came against the backdrop of a potential political gridlock, while a Democratic majority US Congress appeared to be pushing Fed Chair Powell to deny Wall Street lenders a break of what could increase an unnecessary risk, pointing that the deep-pocket Wall Street lenders have sufficient cash to put aside to create an additional layer of loss-absorbing liquidity cushion while continuing their share repurchase programs alongside issuance of dividends.
US Fed to nullify leverage exemption rule
Nonetheless, with uncertainties growing on whether US Federal Reserve would be able to stick on to the expiration date, fixed income markets had witnessed a fresh wave of jitters on the horizon, as lenders had already raised an alarming bell over latest US Fed decision citing that an expiration of that rule could eventually force them to hold back from purchasing Government debts and might lead to a potentially disruptive lending, igniting another spell of market turmoil.
In tandem, as US 10-year Treasury bond yields rose marginally to 1.73 per cent following the announcement in latest vindication of market concerns, voicing a jubilant tone, Democratic Senator Sherrod Brown who had previously cautioned US Fed that an extension of that exemption would be a “grave mistake,” said late in the day, “This is a victory for lending in communities hit hard by the pandemic, and for the stability of our financial system”.