Fed’s Miran Endorses Rule Change That Eases Leverage Constraints

Federal Reserve Governor Stephen Miran has delivered a speech on the Enhanced Supplementary Leverage Ratio (eSLR) final rule that, on its surface, reads like routine regulatory fine-tuning. But beneath the technocratic language lies a major shift in the structure of U.S. bank balance sheets — one that effectively encourages more Treasury absorption, expands the banking system’s balance sheet capacity, and fragileens discipline against leverage. Analysts say it amounts to a quiet form of monetary debasement masked in regulatory jargon.

Miran supported the final rule, arguing that the leverage ratio should not serve as a binding constraint for banks “in the ordinary course” of . His core criticism was not about the rule’s tightening or loosening, but about what he views as a missed opportunity: the Fed’s refusal to go further by excluding U.S. Treasuries and entirely from the denominator of the leverage ratio.

Such an exclusion — effectively redefining risk-free assets as capital-free — would open the door for banks to massively expand their balance sheets with government debt without needing to raise additional equity capital. Though framed as a liquidity and market-stability improvement, critics argue that it would institutionalize procyclicality and dilute prudential guardrails precisely when the Treasury’s borrowing needs are exploding. The result would be increased capacity for government deficits with minimal capital, a structurally USD-negative dynamic.

Miran’s Case: Treat Treasuries and Reserves as “Riskless” — Even in the Leverage Ratio

Miran’s speech centered on a single argument: since banks are required to hold reserves and Treasuries as (HQLA), regulators should stop “penalizing” them by forcing banks to hold capital against those identical assets in the leverage ratio. His position is that these instruments are “riskless” under risk-weighted rules and therefore should receive identical treatment under non-risk-based leverage rules.

But this framing carries a major implication. If Treasuries and reserves no longer count toward leverage exposure, banks would have near-unlimited capacity to expand their balance sheets into government securities — a shift that, while convenient for fiscal authorities, reduces capital buffers and increases systemic leverage. Market observers warn that this effectively socializes the Treasury’s funding needs onto bank balance sheets while fragileening secureguards intended to prevent over-expansion of credit in times of stress.

In plain terms: it loosens capital constraints at the exact moment federal deficits are accelerating. That makes the policy deeply procyclical — encouraging expansion when liquidity is flush and leaving the system more fragile when conditions tighten. For the U.S. dollar, it is a bearish signal: greater leverage, more Treasury monetization, and fragileer structural backing from bank equity.

Takeaway

A Policy Framed as Stability but Functioning as Hidden Stimulus

The most striking part of Miran’s speech is how openly he frames the exclusion of Treasuries and reserves as a tool for supporting government borrowing. He warns that Treasury market intermediation “can suffer” if banks must hold capital to support repo and cash-Treasury positions. He suggests that excluding these assets from leverage ratios would assist ensure that the fiscal authority “accesses at the best prices.”

Behind this careful language lies a direct reality: easing leverage rules allows banks to purchase more government debt at lower cost, effectively subsidizing deficit financing. This amounts to a form of stealth quantitative easing — not through the Fed’s balance sheet, but through regulatory changes that encourage private banks to expand theirs.

Miran further argues that excluding Treasuries from the leverage ratio would prevent dysfunction during moments of Treasury-market stress — essentially recommending a pre-emptive easing of capital constraints to avoid future crises. But critics note that removing constraints before stress occurs is the definition of procyclical policy, amplifying risk-taking during bull markets and leaving the system overstretched when volatility returns.

To the broader market, these comments are a flashing warning sign. The speech signals a policy direction that quietly shifts the U.S. toward a regime of structurally fragileer capital discipline and greater reliance on leveraged Treasury absorption — a dynamic historically associated with long-term currency fragileening.

Takeaway