The Trump administration will soon unleash their real bazooka.

This is the biggest move from the Trump administration, and almost nobody is talking about it.

I am referring to banking de-regulation.

When in early January Michael Barr resigned from vice chair for supervision at the Fed – the role designed to shape banking regulation – the door opened for Trump to pick a replacement.

Trump has now formalized Michelle Bowman as the new vice chair for supervision at the Fed.

Bowman recently released a key speech about banking regulation.

The key line is: “Where we can take proactive regulatory measures to ensure that primary dealers have adequate balance sheet capacity to intermediate Treasury markets, we should do so. This could include amending the leverage ratio and G-SIB surcharge regulations for the largest U.S. banks. In my view, it would be better to fix the roof now, while the sun is shining, by addressing over-calibrated leverage ratio requirements’’.

This is a clear hint to reforming the Supplementary Leverage Ratio (SLR).

What’s the SLR, and Why Does It Matter?

The SLR forces US banks to have enough capital (numerator) against their total asset/leverage exposure (denominator) – and the total leverage exposure refers to every possible asset including risk-free instruments like Treasuries.

You might remember that during the pandemic, the temporarily exempted Treasuries from the SLR calculation: this was done to make sure banks could freely step in and support the US bond market without having to incur in penalties if they breached the SLR limits.

That exemption has now expired.

But a permanent reform of the SLR might be in the cards now.

This is crucial because US banks are now heavily constrained when it comes to buying large amount of US Treasuries.

An SLR reform exempting Treasuries from this binding ratio would free up trillions (!) of balance sheet capacity for the largest US banks, making it much easier for them to buy bonds.

Trump policies might be seen as disruptive from foreign countries that could therefore marginally step away from US Treasuries.

But the SLR reform would bring in a new marginal, gigantic buyer: US banks.

Do you think the Trump administration will move forward with this?

***

This article was originally published on The Macro (BCBA:) Compass. Explore the macro investor, asset allocator, and hedge fund community using this link.