The Continued Financialization of the US - Deregulation
Fiscal Pressure, Financial Innovation: A Regulatory Inflection Point
As the new U.S. administration intensifies its push for deregulation, proposed changes to the Supplementary Leverage Ratio (SLR) and the rapid growth of Treasury-backed stablecoins signal a broader reengineering of financial safeguards. By loosening capital requirements for banks and embracing digital instruments that operate in regulatory gray zones, policymakers appear to be prioritizing liquidity and fiscal flexibility over traditional risk controls. In both cases, the result is the same: a reshaping of financial plumbing to accommodate historic levels of government borrowing—whether through the balance sheets of banks or the digital ledgers of stablecoin issuers.
What is the Supplementary Leverage Ratio (SLR)?
The SLR is a rule that big banks in the U.S. have to follow. It’s like a safety net to make sure these banks don’t take on too much risk by borrowing too much money compared to the capital they have. Think of it as a limit on how much they can "leverage" their operations.
Breakdown of the SLR Calculation
The SLR is calculated as follows:
Tier 1 Capital: This is the core capital of the bank, mainly common stock and retained earnings. It’s the money the bank owns outright, not borrowed.
Total Leverage Exposure: This includes all the assets the bank has, regardless of how risky they are. It’s not just loans but also things like government bonds (Treasuries) and reserves held at the central bank.
For large U.S. banks1, the SLR must be at least 3%. For the biggest banks2 (top-tier holding companies), there’s an additional 2% buffer, making it 5%. So, if a bank has $100 billion in Tier 1 Capital, its Total Leverage Exposure can’t exceed $3.33 trillion (3% of $3.33 trillion is $100 billion) for regular large banks, or $2 trillion (5% of $2 trillion is $100 billion) for top-tier banks.
Why Does This Matter?
Bank Safety: The SLR ensures banks have enough capital to cover losses if things go wrong, protecting the financial system.
Treasury Market Role: Banks, especially those that are primary dealers, buy and sell U.S. Treasury bonds. The SLR affects how much of these bonds they can hold because Treasuries count towards their Total Leverage Exposure.
During the COVID-19 crisis in March 2020, the Fed temporarily changed the SLR rules. They said that U.S. Treasury securities and reserves at the central bank wouldn’t count towards the Total Leverage Exposure. This was like giving banks more room on their balance sheets to buy Treasuries without hitting their capital limits. It helped stabilize the Treasury market when it was under a lot of stress.
What’s Happening Now?
The Federal Reserve (the Fed) is considering changing the SLR again (reducing capital buffers by up to 1.5%), but this time it’s not just a temporary fix for a crisis.
High U.S. Deficits: The U.S. government is borrowing a lot of money (issuing a lot of Treasury bonds) to cover its spending. Foreign investors are buying less of these bonds than before.
Banks as Buyers: If the Fed relaxes the SLR, it means banks can hold more Treasuries without needing as much capital. This could help the government sell its bonds more easily.
Shift in Power: This move might mean the Fed is more focused on supporting the government’s borrowing needs (fiscal policy) rather than just controlling inflation and interest rates (monetary policy). It’s like the government’s spending plans are becoming more important than the Fed’s traditional role.
Implications for Investors
Treasury Market: If banks can hold more Treasuries, it might keep Treasury bond prices higher (or prevent them from falling too much) and yields lower given the lack of foreign buyers in recent times. This is good for the government but could affect other investments.
Bank Profits: Banks might find it easier to make money from holding Treasuries, but it also means they’re taking on more risk if Treasury prices drop.
Economic Stability: This could help keep the economy stable by ensuring the government can borrow, but it might also mean inflation stays higher if the government keeps spending a lot.
Investment Strategy: Investors might want to watch Treasury yields closely. If yields stay low because banks are buying more, it could push investors towards riskier assets like stocks or corporate bonds. Conversely, if the SLR changes lead to unexpected market moves, it could create volatility.
What Are Stablecoins?
Stablecoins are a type of cryptocurrency designed to maintain a stable value, unlike other cryptocurrencies like Bitcoin, which can be very volatile. They achieve this stability by being pegged to another asset, most commonly the U.S. dollar, but sometimes to other currencies, gold, or even other cryptocurrencies. This means that one stablecoin is typically worth about one dollar (or the value of the asset it's pegged to), making it less risky for everyday use compared to other digital currencies.
How Do They Work?
Pegging to an Asset: Stablecoins are backed by reserves of the asset they're pegged to. For example, if a stablecoin is pegged to the U.S. dollar, the issuer holds dollars in a bank account or other secure assets to match the number of stablecoins in circulation.
Issuance and Redemption: You can buy stablecoins with dollars, and the issuer gives you a digital token in return. If you want your dollars back, you can redeem the stablecoin, and the issuer returns the equivalent amount in dollars.
Use in Transactions: Because their value doesn't fluctuate much, stablecoins are used for payments, remittances, and as a bridge between different cryptocurrencies on trading platforms.
Who are Major Issuers of Stablecoins?
Tether Limited (Issuer of USDT - Tether)
Market Position: The largest stablecoin by market capitalization, with over $155 billion in circulation (per CoinMarketCap and Reuters, June 2025).
Backing: Claims to hold reserves in U.S. dollars, cash equivalents, and U.S. Treasuries.
Use Case: Widely used for trading and remittances, especially in regions with unstable currencies.
Circle Internet Group (Issuer of USDC - USD Coin)
Market Position: The second-largest stablecoin, with a market cap of approximately $60 billion (based on 2025 estimates from Reuters and Circle’s IPO filings).
Backing: Fully backed 1:1 by U.S. dollars and short-term U.S. Treasuries, with BNY Mellon as custodian. Circle went public on the NYSE (ticker: CRCL) on June 5, 2025, raising $624 million at a $6 billion valuation, reflecting institutional confidence.
Use Case: Popular in DeFi and cross-border payments, with a network in 185+ countries.
There are also emerging and potential issuers in the rumour mill. CEOs of Bank of America and Morgan Stanley have signaled interest in stablecoins, likely as pilot programs or partnerships. Walmart and Amazon are also exploring stablecoin issuance, leveraging their retail ecosystems for payments.
Stablecoins: A Threat to the Dominance of Payment Networks?
Stocks of major payment processors—including Visa, Mastercard, and American Express—tumbled on June 13, 2025, following a report from The Wall Street Journal. The article revealed that industry giants like Walmart and Amazon are investigating stablecoin payments as an alternative to traditional networks. Investors reacted swiftly, fearing reduced transa…
Impact on Markets, Investors, and U.S. Treasuries
→ Markets
Increased Liquidity: Stablecoins provide a stable medium for trading other cryptocurrencies, reducing the need for fiat currency conversions and increasing market liquidity.
Private Sector: Issuers like Circle profit from interest on Treasury reserves (e.g., Circle’s $1.68 billion revenue in 2024, 99% from reserves) and transaction fees.
Global Transactions: They facilitate faster and cheaper cross-border payments, potentially disrupting traditional banking systems.
Risk of Volatility: If not properly managed, stablecoins could face de-pegging events (losing their stable value), which could cause market instability.
→ Investors
Stability in Portfolios: For investors, stablecoins offer a way to hold value in the crypto space without the extreme price swings of other cryptocurrencies.
Access to Crypto Markets: They allow investors to enter and exit crypto markets without dealing directly with volatile assets.
Potential Risks: Investors face risks if the backing assets are not adequately maintained or if regulatory changes affect the stability of these coins.
→ U.S. Treasuries
Demand for Debt: The growth of stablecoins, especially if backed by U.S. Treasuries, could increase demand for government debt, helping to finance national borrowing. As demand rises, issuers buy more Treasuries to back new issuance, fueling market expansion.
Revenue and Control: This could lead to new revenue streams for the government and more control over digital financial systems.
Regulatory Challenges: However, it also poses challenges in terms of regulation, ensuring the stability and transparency of these financial instruments, and preventing misuse.
What’s Happening Now?
The GENIUS Act's passage in the Senate, with a 68-30 vote, could propel stablecoins to a projected $3.7 trillion market by 2030, potentially reinforcing U.S. dollar dominance globally.
Stablecoins backed by U.S. Treasuries may lower government borrowing costs by increasing demand, as suggested by Treasury Secretary Scott Bessent.
So, What is the Impact to the SLR?
If banks issue stablecoins backed by U.S. Treasuries or other high-quality liquid assets (HQLA), these assets would count towards their total leverage exposure. This could increase the denominator in the SLR calculation (total leverage exposure), potentially requiring banks to hold more capital unless offset by other regulatory adjustments.
Oh, wait, did we not just explain this? Why do you think there is talks of reducing the SLR threshold? Since U.S. Treasuries are not classified as Tier 1 capital, a reduction in the SLR would facilitate the issuance of stablecoins without requiring banks to hold additional capital as a buffer.
In Summary
As a direct response to the Great Financial Crisis (GFC) in 2008, the SLR formally proposed as a non-risk-based "backstop" to complement risk-based capital requirements. In other words, its implementation was to add safeguards to avoid repeating the pre-GFC vulnerabilities. Rolling these back now are the opposite of what the SLR was intended to achieve. Instead of the Fed engaging in quantitative easing, this role can be sought through central banks. This would allow major banks to absorb more Treasuries without breaching leverage constraints effectively creating quiet demand for U.S. debt in a world where foreign buyers have been fading. Historic debt issuance of banks will likely continue under these changes. This is a liquidity valve in a fragmented environment.
The U.S. national debt is over $34 trillion (as of mid-2025 estimates), with annual interest costs exceeding $800 billion. A Reuters report (June 6, 2025) suggests that increased T-bill demand could incentivize the Treasury to issue more short-term debt, potentially reducing reliance on higher-yield long-term bonds. For example, if yields on 3-month T-bills drop from 4.5% to 4% due to stablecoin demand, billions in interest savings could accrue annually. But any rapid redemptions (e.g., during a crisis) could force issuers to sell Treasuries, spiking yields and offsetting savings.
Government borrowing is at a critical juncture, and this may prove to be the short-term mechanism that keeps it afloat. Add to that the fact that these developments are only a glimpse of what’s to come in the deregulation phase of this administration. Monetary inflation will likely persist, and in the looming melt-up phase, hard assets may remain a reliable haven....until BOOM, the collapse!
● Written with the help of Grok
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