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The Fed will not extend a pandemic-crisis rule that had allowed banks to relax capital levels

The Federal Reserve on Friday declined to extend a pandemic-era rule that relaxed the amount of capital banks had to maintain against Treasurys and other holdings, in a move that could upset Wall Street and the bond market.

In a brief announcement, the Fed said it would allow a change to the supplementary leverage ratio to expire March 31. The initial move, announced April 1, 2020, allowed banks to exclude Treasurys and deposits with Fed banks from the calculation of the leverage ratio.

The decision to relax the capital requirements has been widely viewed as key to calming what had been tumultuous Treasury markets in the early days of the Covid-19 pandemic. A need for cash had caused a massive sell-off in the bond market that the Fed helped to cover through its liquidity programs.

The central bank said it will solicit public comment on how to adjust the supplementary leverage ratio in the future but had decided to let the exemption expire now, as planned.

“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.

Bank stocks were sharply lower following the announcement, pulling down the broader market, but government bond yields were mixed.

Reference: CNBC