U.S. banking regulators (the Federal Reserve, FDIC, OCC) voted jointly to approve the final revision of the Supplementary Leverage Ratio (SLR), creating $5 trillion in funding space out of thin air, determining the stability of the $38-40 trillion U.S. Treasury market, marking the formal entry into the era of 'Fiscal Dominance.'
Let's start with the conclusion: the changes in SLR are disruptive, and a new round of super bull market may just begin.
1. Basel's famous golden handcuffs named 'Safety'
1. Lessons from the 2008 crisis
The cause of the 2008 financial crisis was banks' high leverage (making $100 on a $1 capital).
After the crisis, global central banks established Basel III in Basel, Switzerland.
2. The loophole in the "risk-weighted assets" method
Before the Basel III Accord, regulation mainly used the risk-weighted assets method.
Example: Lending money to Old Wang to open a milk tea shop is high risk, while buying U.S. Treasuries is low risk (almost no principal needs to be retained).
Deadly loophole: 2008 proved that even so-called "low-risk assets" can crash in price, posing significant risks.
3. The birth of SLR
To compensate for the loophole in "risk-weighted assets", regulators introduced SLR (Supplementary Leverage Ratio).
Logic: Simple and brutal, not looking at asset quality (whether junk bonds, Treasuries, or Federal Reserve cash), only looking at quantity.
Calculation formula: Bank's Tier 1 capital (numerator) / total assets (denominator) must be greater than a fixed ratio to ensure banks are locked in, leverage decreases, and the system stabilizes.
Requirements for banks that are too big to fail (G-SIBs): baseline $3\% + 2\%$ additional buffer, **totaling $5\%$**.
II. In 2020, when cotton turned into iron, the handcuffs were released.
1. The liquidity exhaustion in March 2020
The outbreak of COVID-19, stock market circuit breakers, and the liquidity crisis in the U.S. Treasury market (no one buying).
The Federal Reserve launches unlimited quantitative easing (QE), but requires commercial banks to also buy Treasuries and provide liquidity.
2. SLR becomes a barrier
Bank presidents stated that receiving cash (reserves) printed by the Federal Reserve or purchasing Treasuries would lead to a sharp expansion of the denominator (total assets).
Consequences: The denominator grows larger, and the SLR index will fall below $5%$, resulting in violations.
Absurd phenomenon: In the face of systemic collapse, banks are unable to rescue the market due to their adherence to regulatory indicators.
3. The "exemption" and "honeymoon period" of 2020
April 1, 2020: The Federal Reserve made an emergency decision to exempt U.S. Treasuries and reserves held by banks from being counted in the denominator of the SLR.
Effect: Banks expand their balance sheets, purchase massive amounts of Treasuries and absorb deposits, leading to a flood of market liquidity, creating a brief "honeymoon" period during which all asset prices soar, including $BTC .
4. Political pressure and non-renewal in 2021
The exemption policy was originally scheduled to end on March 31, 2021.
Political opposition: Senator Elizabeth Warren and other "progressives" strongly oppose, believing that renewal is a betrayal of the lessons learned from 2008.
March 19, 2021: The Federal Reserve announces the expiration of the SLR exemption and will not renew it.
Consequences: In order to comply (SLR index fulfilled), banks begin to refuse deposits, losing their liquidity adjustment capacity, leading to violent fluctuations in the U.S. Treasury market.
At the same time, risk assets began to be sold off, and the $BTC bear market began, falling from 69000 to 15000.
III. The elephant in the room: the helplessness of the fiscal dominance era
1. The background of "Fiscal Dominance"
Definition: The amount of money owed by the government is so large that even financial regulatory rules must give way for the government to borrow.
Debt crisis: U.S. debt has exceeded $38 trillion, increasing by about $1 trillion every 100 days.
2. Who will buy U.S. Treasuries?
Traditional buyers have exited: Countries like China, Japan, and Saudi Arabia have reduced their holdings of U.S. Treasuries due to geopolitical issues and "de-dollarization".
The Federal Reserve cannot buy: blatant QE will lead to hyperinflation.
Last line of defense: commercial banks and hedge funds.
3. Severe situation
Commercial banks are locked by SLR, unable to buy large amounts of Treasuries.
Result: U.S. Treasuries are in oversupply, prices fall, yields soar, and the market is turbulent.
Banks tend to sell low-yield Treasuries, using limited SLR capacity for high-yield loan business, exacerbating the selling pressure on U.S. Treasuries.
Ultimately: Regulators realized that if they did not loosen restrictions on banks, the next U.S. Treasury auction might fail, leading to a bankruptcy of U.S. national credit.
Conclusion: This reform is not for banks or the stock market, but to extend the life of the U.S. Treasury. Political ideals and strict regulations ultimately bow to harsh reality.
IV. The situation in 2025: precise "minimally invasive surgery"
1. The core content of the reform
Regulators modified the calculation formula of **eSLR (Enhanced Supplementary Leverage Ratio)**.
Old rules: Maintain a $3%$ bottom line + $2%$ fixed buffer = $5\%$.
New rules: Maintain a $3%$ bottom line + half of the GSIB additional capital buffer.
2. Analysis of substantial relaxation
GSIB additional scores (adjusted based on bank size and complexity) usually range from $2.5%$ to $3.5%$.
New buffer requirements: approximately $1.25\%$ to $1.75\%$ (i.e., half of the GSIB additional score).
Result: For the vast majority of banks, the new buffer requirements (1.25%-1.75%) are lower than the previously rigid $2\%$, representing a substantial relaxation.
Combination punch: Regulators also fine-tuned the requirements for TLAC (Total Loss-Absorbing Capacity) and LTD (Long-Term Debt).
3. Direct effect: releasing $5 trillion in funds
This series of rule changes will directly release over $5 trillion of balance sheet space.
Use of funds: The regulator's intention is to leave this $5 trillion space specifically for banks to engage in two types of business.
Holding Treasuries + repurchase intermediaries (repurchase market).
Mechanism: Banks can open their doors to engage in repurchase business (lending cash to hedge funds with Treasuries as collateral).
The "veins" of the entire financial system have been opened.
Hedge funds dare to buy new bonds because they can always be pledged for cash.
Banks are willing to do this, as it is a risk-free arbitrage.
Conclusion: This is a "killing three birds with one stone" strategy, which neither directly prints money (the Federal Reserve's job), nor solves the awkwardness of no one buying Treasuries, while also appeasing Wall Street bankers.
V. Who is doing things in secret?
1. True winners
First wave winners: the U.S. Treasury and bondholders. The liquidity crisis is resolved, and U.S. Treasuries have a super buyer.
Second wave winners: cryptocurrencies and gold. The loosening of SLR is essentially a flood of dollar liquidity and invisible QE. Funds will seep into liquidity-sensitive scarce assets, forming a stimulant.
Third wave winners: quantitative hedge funds (especially those engaged in "basis trading"). They need extremely high leverage (50-100 times), previously constrained by SLR. Now banks can lend to them at low cost, allowing them to increase their leverage.
2. The biggest hidden danger
Core issue: To solve the current debt problem, the system is allowed to accumulate higher leverage again.
Risk: If a black swan event occurs in the future (such as war, uncontrolled inflation), causing Treasury prices to plummet again, hedge funds with super leverage may collectively face margin calls, leaving banks with a "hot potato". Market rescue becomes the norm, and regulation always compromises with the market, leading to increasingly reckless behavior.
Summary and outlook
Historical watershed: November 25, 2025 marks the point where U.S. regulators bow to the fiscal deficit and loosen the SLR safety valve.
Reluctant compromise: This is a reluctant compromise, marking that in the era of fiscal dominance, financial regulation must give way to government debt.
Future challenges: After officially coming into effect in April 2026, where will the released $5 trillion liquidity monster flow? Will it honestly buy Treasuries, or rush into the real estate market and cryptocurrency to create a bigger bubble?
New rules: Banks' balance sheets are no longer iron cages, but a huge "breathing bellows", and each breath reshapes the prices of global assets.
