Chart1
A more flexible regulation in favour of Treasury market liquidity
The relaxed leverage requirements achieved the outcome regulators had hoped for: intermediation conditions in the Treasury market improved during the first months of the year. Against a backdrop of heightened uncertainty due to the Iran conflict, major banks were able to absorb a portion of Treasuries that had no buyers. This is reflected in the rising net positions of primary dealers, predominantly G-SIB subsidiaries, which reached 1.8% of the outstanding federal debt in March and April, the highest level since the 2008 financial crisis (Chart2). This increase is particularly significant as, from mid-December to mid-April, the Federal Reserve (Fed) absorbed a substantial share of new T-bill issuance, contrasting with the periods of 2014–2019 and 2022–2025 when the Fed was reducing its holdings. With the Federal Reserve Management Purchases and Treasury buybacks programmes in place, the relaxation of the leverage standard helped preserve Treasury market liquidity and contributed to more favourable conditions in the repurchase agreement (repo) markets.
Primary dealers’ Treasury inventories reach their highest level since 2008Chart2
Federal debt absorption capacity remains limited
The relaxation of the eSLR requirement has not resulted in the anticipated increase in demand for these securities. Admittedly, G-SIB trading portfolios, which contain positions booked by broker-dealer subsidiaries, have grown (averaging 4.13% of leverage exposure in Q1?2026, up from 3.54% in 2025), yet their Treasury investment portfolios (held-to-maturity or available-for-sale) have remained virtually unchanged[4] (6.52% compared with 6.55%; Chart3). Various limitations[5] have prevented the stimulus hoped for by the Treasury Secretary, including the eSLR itself. For seven of the nine large G-SIB depository institution subsidiaries, the standard continues to be binding—or nearly so (Chart1, right-hand panel). Yet, the Treasury investment portfolios of major banks are, for the most part, recorded on the balance sheets of their deposit-taking subsidiaries.
The relaxation of the eSLR requirement has not sparked a significant increase in Treasury purchasesChart3
The proposed reform to G-SIB capital surcharges could likewise provide some momentum
Market-making requires maintaining extensive inventories of securities and executing numerous repo (and reverse-repo) transactions. This tends to inflate leverage ratios at dealer parent companies by enlarging their balance sheets, while also exacerbating their systemic risk scores (due to increased size, short-term wholesale funding, and complexity indicators). These scores are critical in determining the capital surcharges levied on large banks (the G-SIB surcharges).
The Federal Reserve has recently proposed revisions to its methodology[6]. It plans to reassess all the coefficients in its formula (to account for economic growth and inflation), reduce the weight of the short-term wholesale funding indicator, introduce narrower surcharge brackets (to mitigate threshold effects), and calculate positions based on annual average data rather than end-of-period data. These adjustments should give G-SIBs greater flexibility in their intermediary activities and positively impact Treasury market liquidity. They will relieve balance-sheet pressure by reducing both the level and growth rate of surcharges. They should also smooth liquidity supply over the year and reduce repo rate fluctuations around balance-sheet reporting dates.
Nevertheless, this reform is unlikely to trigger large-scale Treasury purchases. On the one hand, leverage standards LR and eSLR are expected to remain binding for most G-SIB deposit-taking subsidiaries. On the other, the proposed relaxation of risk-weighted capital rules could reverse the prevailing hierarchy of capital requirements, pushing the leverage standard back to a “binding” status on a consolidated basis[7] and deterring large banks from acting as market-makers.
The expanding scope of centralised clearing for Treasury repo transactions could improve market liquidity. However, unless the federal debt trajectory is more effectively managed, US authorities may feel compelled to continue using tools to maintain the role of dealers in the Treasury market.
