BPInsights: April 12, 2025

Treasury's Bessent: Regulators 'Hard at Work' on Leverage Ratio Reform

Treasury Secretary Scott Bessent emphasized the necessity of leverage ratio reform in remarks at a conference this week. He noted that post-Global Financial Crisis regulatory changes required banks to stockpile reserves, Treasuries and other liquid assets; more than a quarter of banks' balance sheets are now allocated to these assets, more than double the share before the crisis. "I previously raised concerns about whether the leverage capital restrictions are too frequently binding," Bessent said. "The bank regulators are now hard at work to develop a proposal to ensure that leverage capital functions as appropriate." Bessent also mentioned SLR reform and the advantages it would bring to banks' Treasury market-making capacity on a Fox News interview this week.

• Learn more: Fixing the supplementary leverage ratio, which constrains large banks' ability to intermediate in the Treasury market, is crucial for addressing potential strains in that market under stress. Learn more about the need for SLR reform here, how it relates to Treasury market stress here and additional context here.
• Bessent on Basel: Bessent also said the July 2023 Basel Endgame proposal is "not … the right starting point for a modernization effort." Important aspects of the proposal "cannot be explained or understood because the Basel Committee offered little rationale." He also noted that when U.S. regulators deviated from international Basel standards, they invariably did so to "reverse-engineer increases in capital." "We should not outsource decision making for the United States of America to international bodies," he said. "Instead, we should conduct our own analysis from the ground up to determine a regulatory framework that is in the interest of the United States and its citizens."
• Supervision: Bessent acknowledged the work underway at the banking agencies to remove "reputational risk" as a basis for supervisory criticisms. He reiterated a call for significant change in bank supervision, with a focus on material risk.
• Liquidity: Bessent called to reassess the costs and benefits of the liquidity framework. Liquidity requirements' shifted focus onto safe assets has resulted in less funding available for businesses and households. "Abundant reserves might have prompted some examiners to ratchet up their expectations as to minimum reserves without any formal change in regulation, essentially establishing a de facto reserve requirement through supervision," Bessent said. Policymakers should identify opportunities to expand the role of loans and other productive assets as collateral for funding during stress, he said. Notably, he suggested revisiting "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." In addition, he said: "Our assessment will also consider whether 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."

Five Key Things

1. Fed's Miki Bowman Testifies at Nomination Hearing for Supervision Role

Federal Reserve Governor Michelle "Miki" Bowman testified at a Senate Banking Committee hearing this week for her nomination as Fed Vice Chair for Supervision. In written testimony, Bowman stressed the need to reform and refocus supervision "to better address core and material financial risks." She also reiterated support for tailoring rules to banks' different sizes and business models and called for transparency in regulation and supervision. Bowman said regulators should employ a pragmatic approach, identifying problems targeted by regulations and considering costs and benefits. "We must prioritize the identification and remediation of issues that may pose long-term structural problems to the banking system and the critical markets it supports, including addressing regulatory disincentives to Treasury market intermediation activities by banks and their affiliates," she said. Here are some key exchanges.

• Supervision: Sen. Thom Tillis asked Bowman about supervision and whether the Fed had previously focused too much on extraneous issues instead of core risk. Bowman said that one example of that problem was the Fed's supervision of Silicon Valley Bank. She said Fed supervisors have focused on ancillary issues instead of material risks.
• Basel: Bowman called for a "fresh look" at the Basel Endgame capital proposal. "We'll need to take a fresh look at the last Basel agreement and see what's appropriate for U.S. banks and their ability to have a level playing field internationally," she said.
• Costs and benefits: In response to Sen. Jack Reed (D-RI), Bowman noted the importance of evaluating rules' costs and benefits with analysis. Reed was discussing the recent executive order requiring agencies to submit regulatory plans to OMB for review.
• Monetary independence: In response to Sen. Mark Warner (D-VA), she affirmed her support for the Fed's independence on monetary policy.

2. The FT on Risks Lurking in the Treasury Market (and How to Resolve Them)

The Financial Times Alphaville blog this week explained this week why a recent selloff in the U.S. Treasury market could be a warning sign. At the center of the storm is the Treasury basis trade, a strategy in which investors (typically, hedge funds) exploit price discrepancies between Treasury bonds and the futures contracts associated with them - buying the cheaper bonds and selling the more expensive derivatives. The basis trade often involves heavy leverage to amplify the profits. Volatility and a sharp upward move in rates will increase the margin requirements of hedge funds and the haircut on their repo financing, forcing them to close out their positions and sell Treasuries, pushing the rate even higher, leading to more sales.

Alphaville notes: "The best proxy for [the basis trade's] overall size is the net short Treasury futures positioning of hedge funds, which currently stands beyond $800bn, with asset managers the mirror image on the long side. The problem is that both Treasury futures and repo markets demand much more collateral when there is an unusual amount of volatility in the Treasury market. And if the hedge fund can't pony up then lenders can seize the collateral - Treasury bonds - and sell them into the market."

• Quote: Alphaville's Robin Wigglesworth wrote: "We saw exactly how this latent vulnerability can morph into a systemic risk in March 2020, when a 'dash for cash' by foreign central banks and bond funds swamped by investor withdrawals were forced to ditch the most sellable asset they had: US Treasuries. That in turn pummelled hedge funds that had put on monstrously leveraged Treasury basis trades, and threatened to turn a messy bout of Treasury liquidation into a cataclysmic financial crisis. Only Herculean efforts by the Federal Reserve - its balance sheet expanded by $1.6tn in just one month - prevented it."
  Constraints: The Alphaville article quotes Apollo economist Torsten Slok, who notes that a rapid unwind of hedge funds' highly leveraged positions in Treasuries "would have to be absorbed, in the short run, by a broker-dealer that itself is capital-constrained."
• Making a bad problem worse: While the Fed could replace broker-dealers as the "market maker of last resort," the article notes how the Fed's prior intervention has encouraged further use of the trade by effectively establishing a Fed put: "Many regulators and policymakers have been worried about the Treasury basis trade ever since, not least because the Fed's actions constituted a de facto bailout of the strategy. That the basis trade has since swelled to become far larger than it ever was before March 2020 has understandably increased those concerns even further."
• Potential solution: Rather than the Fed rescuing the market as in 2020, a less costly way forward would be the Fed reforming the enhanced supplementary leverage ratio and the GSIB surcharge. The SLR in particular acts as a binding constraint on bank-affiliated primary dealers and prevents them from intermediating in markets. Now, when intermediation capacity is critical, would be an ideal time to make a change. Thankfully, regulators appear focused on reform. As recently as this week, Treasury Secretary Scott Bessent and Vice Chair for Supervision Miki Bowman have called for reexamining regulatory disincentives for banks intermediating in Treasuries.

3. OCC Hack Revealed Sensitive Exam Details

An investigation into a cyber breach in the Office of the Comptroller of the Currency found that sensitive information about banks' financial condition - part of the OCC's examination regime - was compromised, the OCC said this week. According to the OCC, which notified Congress this week about the "major information security incident," the agency experienced an email breach in May 2023 and discovered in February that highly sensitive information was compromised. The OCC's review of the breach is ongoing, but "based on the content of the emails and attachments reviewed thus far, the OCC, in consultation with the Department of the Treasury, determined the incident met the conditions necessary to be classified as a major incident."

• Context: News of the breach comes as the OCC and other banking agencies have ramped up scrutiny on banks' cybersecurity practices in their examination processes. The incident underscores that the government, perhaps even more than the private sector, is vulnerable to security breaches, too.

4. GAO Calls on U.S. Government to Address Scams

The Government Accountability Office this week called on U.S. policymakers to protect consumers from scams, which cost Americans billions of dollars per year. The lack of head-on, coordinated federal action against this threat could be making consumers more vulnerable, the report suggested. "There is no government-wide estimate of the money lost to scams, no common definition of scams, and no national strategy for combating them," the GAO said. "Having these could help federal agencies protect consumers."

• Fragmented approach: The government approach to scams suffers from silos and fragmentation, with tactics scattered across a dozen government agencies, the report said. The CFPB, FBI and FTC are all involved in gathering data on scams and educating consumers, but better data collection and estimates are necessary to understand the magnitude of the problem.
• Recommendations: The GAO recommended the FBI lead a U.S. government effort to develop a government-wide strategy on addressing scams. The recommendations also called on agencies to increase coordination, improve and harmonize data collection, estimate consumer losses from scams and measure the effectiveness of their education campaigns.
• Industry view: The banking industry has called for a uniform approach from the U.S. government in fighting scams and fraud. Most recently, Fifth Third CEO Tim Spence emphasized the need for a national fraud-fighting effort with a united front.

5. House Panel Eyes Treasury Market Resilience

The House Financial Services Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity held a hearing this week examining the health of the U.S. Treasury Market and various regulatory measures affecting it. Witnesses at the hearing were UBS Managing Director Tom Wipf, International Swaps and Derivatives Association CEO Scott O'Malia, MIT professor Kristin Forbes and Brookings Senior Fellow Nellie Liang, formerly the Treasury Department's point person for the Treasury market.

• Setting the stage: Lawmakers discussed recent shifts in the Treasury market, which they emphasized as a critical linchpin of global finance. They noted the surge in U.S. Treasury debt in recent years. In addition, "the last decade has brought significant changes in technology and regulation, which have impacted the capacity of dealers to provide market liquidity in periods of stress," Task Force Chair Frank Lucas (R-OK) said. He also raised concern about the role of Treasuries in the Fed's monetary policy and balance sheet. House Financial Services Chair French Hill (R-AR) emphasized this dynamic, noting that the Fed is the largest purchaser of Treasuries.
• Regulatory barriers: Task Force Ranking Member Juan Vargas (D-CA) urged banking regulators to re-examine the supplementary leverage ratio, which constrains banks' ability to intermediate in the Treasury market. He noted a potential role for central clearing in addressing Treasury market strains. In addition, Nellie Liang reiterated her call for SLR reform. She suggested various adjustments such as excluding central bank reserves from the SLR calculation, but "with an adjustment to the formula so that there would not be a reduction in the total amount of capital." Another option she raised: making the eSLR buffer countercyclical, where it could be "released" during stress.

In Case You Missed It

No Matter the Cost: The SEC's Risky Quest for Cyber Transparency

An SEC rule forcing public companies to make premature public disclosures of cyberattacks would expose companies to further danger, a new BPI blog post explains.

• Background: The SEC under its previous chair sought to micromanage public companies' cybersecurity practices. The linchpin of this effort - a rule requiring public companies to disclose cyber breaches or hacks to investors within four business days of determining the incident is material - would undermine, rather than bolster, cyber defenses and put businesses at risk.
• Too early: The compressed timeline required by the rule would force companies to make incidents public before they are resolved. This could re-victimize companies by giving attackers a roadmap of their defenses and infrastructure.
• Distracting: The requirement also distracts cybersecurity professionals from their work on the front lines of a breach. Imagine a new law requiring that firefighters leave a burning building to send a press release about the fire before it is extinguished. Paperwork shouldn't take precedence over incident response.
• Full context: The rule is one of many cyber regulatory initiatives from multiple government agencies. As a critical-infrastructure sector vital to U.S. national security, the banking industry is subject to a panoply of these rules. It is imperative to harmonize them and ensure they are not imposing duplicative requirements.
• Time for action: Now is the time for the SEC to undo this damage and rescind the rule, fostering security for U.S. public companies.

Living Wills, Crypto: Highlights from FDIC's Hill

FDIC Acting Chair Travis Hill commented on various regulatory priorities in remarks this week. Here are a few highlights.

• Crumbling bridges: Hill expressed concern that the wrong lessons on bank resolution were absorbed in the wake of the 2023 bank failures. Under a resolution planning rule updated in 2024, for example, resolution planning centered on entering and exiting a bridge bank: "I think a key lesson of the 2023 bank failures is how costly a bridge bank solution can be." Hill pointed out that bridge banks can continue to hemorrhage deposits after the bank has officially failed. Instead, he said, regulators should look to sell the bank, or at least parts of it, as quickly as possible. The FDIC plans "in the coming days" to issue updated FAQs on resolution plan (or "living will") submissions, Hill said. The FDIC will still require these plans, but will waive some of the requirements and look for plans focused on providing the FDIC the details necessary to rapidly sell the bank in a failure and operate it for a short time if needed. The FDIC will also engage with large banks in their capacity as potential acquirers of a failed institution to solicit information that will help the FDIC "be as prepared as possible" to rapidly market failed institutions in the future.
• Digital assets: Hill mentioned several questions that the FDIC is considering in digital assets and crypto. He alluded to the FDIC's new guidance for banks - reversing a previous policy that effectively prohibited banks from engaging in crypto - and said the agency will also issue new guidance on particular crypto-related activities. One question in mind - "should we more comprehensively identify which crypto-related activities are permissible?" he said. Areas for further study could include bank use of permissionless public blockchains, questions related to stablecoins and clarity around tokenized deposits.
• Novel charters: Hill said the FDIC is working on a request for information about Industrial Loan Companies to solicit views from the public on this charter type. On novel entrants to the banking system generally, he said: "Overall, deposit insurance remains a special government privilege, and we will maintain rigorous standards for approval in line with our statutory requirements. But we will do so with an eye towards reestablishing a meaningful pipeline of new entrants into the banking sector."
• Tailoring: The FDIC is inventorying and analyzing numerical thresholds in its regulations with an eye towards adjusting or possibly indexing those thresholds to reflect growth. Hill noted that the banking agencies 2019 rule establishing "tailoring" categories for large banks indicated the rule's quantitative tailoring thresholds should be evaluated periodically "to ensure they appropriately reflect growth on a macroeconomic and industry wide basis."

Lawmakers Urge OMB to Streamline Duplicative Cyber Requirements

A group of lawmakers this week urged the Office of Management and Budget in a letter to streamline duplicative cybersecurity regulations that distract companies from crucial incident response. "The U.S. cyber regulatory regime should facilitate valuable and actionable information sharing that reinforces the security measures companies undertake to defend against, and respond to, cyber incidents," wrote the lawmakers, led by Rep. Mark Green (R-TN), Chair of the House Committee on Homeland Security and Rep. James Comer (R-KY), Chair of the Committee on Oversight and Government Reform. "As nation-state and criminal actors increasingly target U.S. networks and critical infrastructure in cyberspace, we can no longer allow compliance burdens to hinder the agility of U.S.-based companies to respond to threats in a timely manner." The letter cited recent congressional testimony by BPI's Heather Hogsett emphasizing the need to harmonize federal cyber requirements.

BPI's Nelson on Macro Musings Podcast: Why Central Banks Are Embracing the Ceiling

Global central banks, including the ECB, Bank of England, Reserve Bank of Australia and Bank of Canada, are embracing a system of reserves in which market rates are pinned down by lending facility rates rather than deposit facility rates. While such frameworks are often called demand-driven floor systems, their behavior suggests they are more like "demand-driven ceiling systems," BPI Chief Economist Bill Nelson explains on a new episode of the Macro Musings podcast with the Mercatus Center's David Beckworth. Learn more about this phenomenon in central bank plumbing and why it matters here.

• Treasury market concern: Beckworth asked Nelson in the interview what worries him most at the moment about the financial system, and he responded: "The thing that really keeps me up at night now … it's the Treasury market. Treasury market intermediation used to be provided by broker dealers, broker dealers that are owned by banks, and now those institutions since the Global Financial Crisis have to fund themselves with a lot of capital to invest in safe assets … the things they need to intermediate," he said. "As a result their capacity has been unchanged for 15 years, over a period when the Treasury debt has quadrupled. And so, the Treasury market - it works under normal circumstances, but it's brittle. And if there's anything that disrupts it, moves things around rapidly, it could overwhelm its capacity and unfortunately just have to require more Fed intervention in financial markets."

Lawmakers Send Repeals of CFPB Rules to President's Desk

Congress voted this week to approve Congressional Review Act resolutions invalidating two CFPB measures: a rule limiting overdraft fees to $5, and a rule known as the "larger participant rulemaking" imposing scrutiny on nonbanks with digital wallet platforms. The measures now head to the White House for expected approval.

Senate Confirms Atkins to Lead SEC

The Senate this week voted to confirm Paul Atkins, formerly chief executive of Patomak Global Partners, as chair of the Securities and Exchange Commission. The vote was 52-44.

The Crypto Ledger

Here's what's new in crypto.

• Waller: Federal Reserve Governor Christopher Waller recently said that stablecoins bring benefits to the financial system, including competition, efficiency and speed. He added that he does not expect "100 stablecoins circulating after legislation happens." Waller also reiterated his view that the private sector should take the lead on payments innovation, rather than the government.
• DOJ enforcement: The Department of Justice this week announced the disbandment of the National Cryptocurrency Enforcement Team, which spearheaded the DOJ's recent crypto hack and money-laundering prosecutions. The DOJ is pivoting its crypto focus to investigating crimes with crypto as the means, such as narcotics and human trafficking; the crypto-focused probes will be deferred to financial regulators, according to media reports.
• House hearing: A subcommittee of the House Financial Services Committee this week held a hearing examining "aligning the U.S. securities laws for the digital age." The topic of the hearing evokes the debate in recent years over whether the SEC has jurisdiction over digital assets - that is, whether cryptocurrencies are securities under U.S. law.

Global Economic Conflicts, Need for Reg Reform - JPMorgan's Latest Shareholder Letter

JPMorgan Chase CEO Jamie Dimon released his annual letter to shareholders this week. The letter expressed concern and offered recommendations on resolving critical issues in the political and economic environment, including an overhaul of inefficient regulations and the need to enact policies that support free enterprise and economic growth. "Regulations shouldn't be like concrete (immovable) - they should be constantly improved," Dimon wrote. "U.S. law already requires major rules and regulations to have a cost-benefit analysis done - this needs to be fully enforced." On bank regulation specifically, Dimon emphasized the flaws and distortions of the stress tests, supplementary leverage ratio and GSIB surcharge and observed the massive growth in financing outside of the regulated banking system. Read the full letter here.

• Media interview: Dimon emphasized the "radical changes" needed in bank supervision in an interview on Wednesday with Fox Business. He reiterated the call for cost-benefit analysis on rules and noted the constant addition of new rules without considering the full picture. He also expressed support for Miki Bowman's nomination.

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