In the complex machinery of the global financial system, U.S. Treasury bonds are considered the ultimate safe asset, the bedrock upon which everything else is built. But what happens when the very rules designed to keep banks safe inadvertently make this bedrock less stable? This is the central question raised by a recent push from within the Federal Reserve itself. Federal Reserve Governor Stephen Miran has publicly called for a significant regulatory shift: exempting U.S. Treasury securities from a key bank rule known as the leverage ratio. This seemingly technical adjustment, debated among regulators and lobbyists, carries profound implications for the safety of the banking system, the cost of funding the U.S. government, and the hidden vulnerabilities within the world’s most important market. Miran’s argument, set against a backdrop of broader deregulation, suggests that current rules may be doing more harm than good, but critics worry the proposed cure could plant the seeds for the next financial crisis.
Understanding the Leverage Ratio and Why It Matters
To understand the debate, one must first grasp what the leverage ratio is and why it exists. In the aftermath of the 2008 financial crisis, regulators worldwide sought a simple, non-negotiable rule to prevent banks from taking on excessive risk. The enhanced supplementary leverage ratio (eSLR) was one such response. Unlike other capital rules that assess the riskiness of a bank’s assets, the leverage ratio is brutally simple: it requires large banks to hold a minimum level of capital against all their assets, regardless of how safe those assets are considered to be. If a bank has $100 in total assets, it must hold a set percentage of that, say $5, in capital to absorb potential losses. The logic was straightforward—during the last crisis, assets deemed “risk-free,” including certain government bonds, suddenly became risky, and banks were not holding enough capital to weather those losses.
This is where U.S. Treasury bonds enter the picture. By any standard, U.S. government debt is among the safest investments in the world. However, under the leverage ratio, a Treasury bond is treated the same as a high-risk corporate loan or a complex derivative. From a bank’s perspective, this creates a financial disincentive. Holding Treasuries consumes precious capital that could otherwise be deployed for more profitable activities. Governor Miran and proponents of an exemption argue this has a dangerous, real-world consequence: it discourages banks from acting as crucial middlemen in the Treasury market, especially during times of stress. When markets panic and everyone rushes to buy safe-haven Treasuries, banks need to hold large inventories to facilitate trading. If holding those Treasuries becomes too costly from a capital perspective, banks may step back precisely when they are needed most, potentially causing the market to freeze. This is not a theoretical concern; regulators saw glimpses of this dynamic during the “dash for cash” in March 2020, which is why they temporarily relaxed the leverage ratio at that time.
The Argument for Exemption: Preventing the Next Liquidity Crunch
Governor Miran’s case rests on the unique role Treasury bonds play in the global financial system. He contends that treating the bedrock asset of the entire system as just another item on a balance sheet is a regulatory failure. In his recent remarks to a banking group, he stated that exempting Treasury debt would “insulate” the market, ensuring banks are not penalized for providing liquidity during turbulent periods. His reference to the COVID-19 pandemic exemption is a powerful part of this argument. During that crisis, the temporary relief allowed banks to dramatically increase their holdings of Treasuries and reserves without breaching their capital requirements, a move widely credited with helping to stabilize seizing markets. Miran is essentially advocating for making that emergency measure a permanent feature of the financial architecture.
This push aligns with a broader regulatory overhaul being led by the Fed’s Vice Chair for Supervision, Michelle Bowman. The proposed reforms to the eSLR already seek to tailor the rule more closely to a bank’s systemic importance. However, Miran is urging his colleagues to go a step further than their June proposal and grant a full exemption for Treasuries. The underlying fear is one of market structure. The U.S. government is continuously issuing massive amounts of debt to fund its operations. If the primary dealers—the large banks obligated to buy this debt at auction—are constrained by capital rules, it could make it more difficult and expensive for the government to borrow money. This could increase the interest rates the U.S. Treasury must pay on its debt, a cost ultimately borne by taxpayers. Furthermore, a less liquid Treasury market could have ripple effects across the globe, affecting everything from mortgage rates to corporate borrowing costs, as Treasury yields are the reference rate for nearly all other credit.
The Unseen Dangers of Treating “Safe” Assets as Risk-Free
While the argument for bolstering Treasury market liquidity is compelling, financial historians and consumer advocates warn that the proposed exemption carries its own severe, if less immediate, risks. The core principle of post-crisis regulation was that no asset is truly without risk. The exemption Miran proposes would reintroduce a pre-2008 mindset into the financial system, creating a regulatory blind spot. If banks are allowed to load up on Treasury bonds without setting aside capital, what happens if the unthinkable occurs and the U.S. government itself faces a debt crisis or a technical default? While considered highly unlikely, such an event would instantly render banks’ “safe” assets deeply troubled, potentially triggering insolvencies without adequate capital buffers to absorb the shock. The system would be repeating the error of 2008, when over-reliance on triple-A rated mortgage bonds nearly collapsed the global economy.
This debate also touches on a fundamental question of regulatory philosophy. Is the goal of banking rules to manage the day-to-day functioning of specific markets, or is it to ensure the solvency of individual institutions against all potential shocks, however remote? An exemption for Treasuries clearly prioritizes the former at the potential expense of the latter. It creates a powerful incentive for banks to arbitrage the rules by accumulating vast amounts of government debt, potentially crowding out lending to businesses and consumers. This could make the banking system safer against a corporate downturn but profoundly more vulnerable to a fiscal crisis. Furthermore, critics argue that this is a solution that primarily benefits the largest Wall Street banks, easing their capital constraints and boosting their profitability when dealing in government securities. The move is seen by some as part of a wider deregulatory agenda under the current administration, one that is chipping away at the safeguards erected after the last major crisis, potentially setting the stage for the next one.
A Balancing Act with the Global Economy in the Balance
The push to exempt Treasuries from the leverage ratio is more than a technical regulatory tweak; it is a high-stakes balancing act. On one side of the scale is the undeniable need for a deep and liquid market for U.S. government debt, the foundation of global finance. On the other is the principle that banks must be resilient against a full range of risks, including those that seem improbable today. Governor Miran’s proposal is a bet that the immediate danger of a frozen Treasury market is greater than the long-tail risk of a U.S. sovereign debt crisis. His influential voice, combined with his expected return to a top White House economic role, suggests this idea will remain a central focus of financial policy. The decision ultimately rests with a divided community of regulators who must weigh the appeal of smoother market function against the hard-learned lessons of history. In choosing a path, they will determine whether the safest asset in the world deserves a special pass from the rules, or if that very safety is a illusion that prudent regulation cannot afford to indulge.
