The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Stephen Gandel

NEW YORK, June 25 (Reuters Breakingviews) - With apologies to Archimedes, give banks enough leverage and they shall move the world of U.S. Treasury bonds. The Federal Reserve and other regulators are debating whether and how to relax capital requirements so the country’s biggest lenders can be more active in the government debt market. The two leading options are subpar, but there’s a third way.

At issue is the so-called Supplementary Leverage Ratio, or SLR, a 2010 provision to ensure mega-banks have an extra capital cushion against falling asset values. Curbing investment in the name of systemic safety is now considered to be hurting trade in U.S. bonds. Treasury Secretary Scott Bessent in March pressed for the rules to be revisited.

April provided a timely reminder. President Donald Trump’s tumultuous “Liberation Day” tariffs pushed interest rates up, and spreads used as barometers of financial stress widened. Tax legislation moving through Congress also would increase the national deficit, which could heap additional pressure on the Treasury market.

One proposal for changing the SLR, which specifies a minimum level of equity a bank must hold against all its assets instead of weighting them based on risk measures, would be to exclude government debt from the calculation altogether. It has the appeal of simplicity, but would be bad policy. Silicon Valley Bank loaded up on Treasury bonds and was caught wrong-footed. Plus, Uncle Sam’s credit can hardly be considered “risk-free” these days.

Another idea would be to lower the SLR for JPMorgan, Citi and four other big U.S. banks from its current 5% ratio to, say, 3.5%. The problem is that it might not achieve what Treasury wants. A cut that size would only allow the supersized six to collectively hold an extra $225 billion in U.S. debt, less than 1% of the $28 trillion outstanding, according to Reuters Breakingviews calculations. In time, the change could free up more, but the banks also would have to raise that money from new deposits or debt and there’s no guarantee it would flow into government bonds.

A better option would be to exclude Treasuries from SLR calculations, but only in bank trading operations and where the debt is valued at market prices. This would force them to impute some risk and create a natural limit on holdings because gyrations in government debt values would affect their bottom lines. It also could have a more immediate and targeted impact as lenders would be shifting their assets, not adding new ones, and encourage more daily dealing. As Archimedes noted, the strongest leverage also calls for a solid fulcrum.

Follow Stephen Gandel on LinkedIn and X.

CONTEXT NEWS

The U.S. Federal Reserve is meeting on June 25 to discuss plans to modify the supplementary leverage ratio, or SLR, which dictates the minimum amount of equity that the country’s biggest banks must hold as a percentage of their total assets.

Two other regulators, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, confidentially filed their own SLR proposals earlier in June.

Treasury Secretary Scott Bessent said on March 6 that regulators should take a hard look at whether to relax the SLR to allow lenders to hold more U.S. government bonds.

(Editing by Jonathan Guilford; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on GANDEL/ stephen.gandel@thomsonreuters.com))