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Thursday, March 25, 2021

Bank Statutory Liquidity Ratio (SLR)

 This video does an excellent job at explaining the change in the financial system that will occur on March 31st, due to the Federal Reserve has stated they cannot extend the SLR exception put into place 1 year ago.

The important aspect is banks that are a GSIP (Globally Systemically Important Banks) must become compliant to normal GAP accounting.  The SLR rule was suspended for a reason, to enable banks to have more ability to loan money in the downturn.

However, now that the SLR rule is being put back, people are questioning how to do do accounting related to this rule.  Depending what is determined to be the right way to enforce the SLR rule, it could have substantial consequences for bank liquidity.

The theory is the banks will take cash deposits and buy treasuries to improve their balance sheet.  Assuming this is true, it will drive bond rates down, which by the way may help markets appreciate.

Another view is banks refuse to buy treasuries, causing rates to spike hard.

Skip to 36 minutes in to see the potential impacts.


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