By Jon Hill

Law360 (March 19, 2021, 2:01 PM EDT) -- Federal banking regulators said Friday that they will not be extending the temporary capital relief granted to big banks after the coronavirus pandemic hit last year, a move that comes despite lobbying from the banking industry and Republican lawmakers to leave the measure in place for longer.

Since last spring, larger banks have been allowed to exclude their holdings of U.S. Treasury securities and cash reserves from the calculation of their supplementary leverage ratios, which gauge capital strength and must meet certain minimums that can put constraints on banks' risk-taking activities.

The change was intended to support the flow of credit to U.S. consumers and businesses during market strains and disruptions caused by the pandemic, but the Federal Reserve Board announced Friday that this relief will expire on March 31 as originally scheduled.

The Fed also said it will soon propose other modifications for the SLR going forward, citing concerns about the ratio's potential unintended consequences for banks in light of the "recent growth in the supply of central bank reserves and the issuance of Treasury securities."

"The board will take appropriate actions to assure that any changes to the SLR do not erode the overall strength of bank capital requirements," the Fed said in a statement.

The SLR applies to banks with more than $250 billion in total assets, requiring them to hold a certain minimum ratio of high-quality capital relative to their assets, including loans and other exposures. This required ratio is expressed as a percentage and increases with bank size and complexity.

By excluding very low-risk assets like Treasuries from the ratio's denominator, federal regulators expected last spring to unlock as much as $1.2 trillion in additional leverage capacity at big banks, giving them more room to accommodate an influx of Treasuries and deposits without having to cut back on lending or other activities at a critical period of economic turmoil.

The relief was welcomed by the banking industry, which has long had misgivings about the SLR. And in recent weeks, with the March 31 expiration date looming, industry groups had campaigned for an extension and warned that the economic recovery could be endangered without it.

"Projections for the growth of the Federal Reserve's balance sheet, future fiscal stimulus, and forward Treasury issuance will result in firms' SLR requirements becoming more binding" if there is no extension, several financial trade associations told the Fed in a letter last month.

In that scenario, the groups said banks might be less willing to accept deposits or participate in the U.S. Treasury market, a result that could impair the liquidity of that market and drive customers into the arms of nonbanks.

Republican lawmakers also joined in the push for an extension, expressing concerns to Fed Chairman Jerome Powell at congressional hearings last month about risks to the Treasury market and economy more broadly if the SLR relief were allowed to lapse.

But Democrats like Senate Banking Committee Chairman Sherrod Brown of Ohio and Sen. Elizabeth Warren of Massachusetts have argued that it's dangerous to keep big banks' capital requirements relaxed in a perilous economic climate and questioned the need for relief, suggesting that banks could get similar benefits by halting dividends and share repurchases instead.

Brown, who had urged the Fed and other federal banking regulators to restore the previous SLR standards as quickly as possible, applauded the decision to let the relief expire in a statement Friday.

"This is a victory for lending in communities hit hard by the pandemic, and for the stability of our financial system," Brown said. "I will continue to fight for regulators to prioritize the real economy over stock buybacks and dividends."

Still, Friday's decision from the Fed, which was joined by the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, won't be the last word on the SLR.

Although the Fed said in its announcement that the market for Treasuries "has stabilized" since the relief was adopted last spring, it acknowledged industry concerns about another coming wave of government debt and continued Fed asset purchases.

"Because of recent growth in the supply of central bank reserves and the issuance of Treasury securities, the board may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability," the Fed said.

The Fed did not provide details about what changes it is considering but said it will be putting them out for public feedback shortly.

"The proposal and comments will contribute to ongoing discussions with the Department of the Treasury and other regulators on future work to ensure the resiliency of the Treasury market," the Fed said.

--Editing by Alyssa Miller.

Update: This story has been updated with additional details.

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