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Didn't Notice The Proposed Changes To The SLR? Don't Worry, Most Markets Didn't Either

Jeffrey Snider profile picture
Jeffrey Snider

The US Treasury released its first report (under Trump) on re-examining financial regulations and their impact on economic growth. The publication was little noticed because most people don't much care about Supplemental Leverage Ratios (SLR), though they should.

For decades, regulators allowed banks to operate under Basel rules as if capital ratios were sufficient criteria for identifying risks, only to suffer the worst global monetary panic since the Great Depression. Some people did notice that banks like Bear Stearns and Lehman Brothers were by all regulatory standards "well capitalized," and yet, their balance sheets were hugely extended, often with leverage ratios of 33, even 35, to 1.

The ability of banks to be able to manipulate capital ratios was at the core of the eurodollar system's global expansion especially after 1995 (J.P. Morgan; RiskMetrics). If you understand what goes on in constructing a bank balance sheet (as I will go through in great detail in my upcoming series, Eurodollar University), there was no inconsistency in blown-out leverage ratios at seemingly "well-capitalized" banks.

This placed a great deal of importance on especially derivatives that served the function of "regulatory capital relief"; which simply means the ability to take whatever asset and describe it in the most charitable way possible so as to reduce the capital charge of that asset. This is not, as it may seem in my description here, utterly and totally nefarious; as with all things, even the best ideas can at times get far out of hand and be bastardized toward purposes either different or to extremes other than originally intended.

If a bank has a choice of lending in a mortgage at a 100% risk weighting or buying an MBS with similar characteristics at a 50% or even less risk weighting, the choice is obvious. Flipping the capital ratio around, for the

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Jeffrey Snider profile picture
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. Jeff joined Atlantic Capital Management, Inc., in Buffalo, NY, as an intern while completing studies at Canisius College. After graduating in 1996 with a Bachelor’s degree in Finance, Jeff took over the operations of that firm while adding to the portfolio management and stock research process. In 2000, Jeff moved to West Palm Beach to join Tom Nolan with Atlantic Capital Management of Florida, Inc. During the early part of the 2000′s he began to develop the research capability that ACM is known for. As part of the portfolio management team, Jeff was an integral part in growing ACM and building the comprehensive research/management services, and then turning that investment research into outstanding investment performance. As part of that research effort, Jeff authored and published numerous in-depth investment reports that ran contrary to established opinion. In the nearly year and a half run-up to the panic in 2008, Jeff analyzed and reported on the deteriorating state of the economy and markets. In early 2009, while conventional wisdom focused on near-perpetual gloom, his next series of reports provided insight into the formative ending process of the economic contraction and a comprehensive review of factors that were leading to the market’s resurrection. In 2012, after the merger between ACM and Alhambra Investment Partners, Jeff came on board Alhambra as Head of Global Investment Research. Currently, Jeff is published nationally at RealClearMarkets, ZeroHedge, Minyanville and Yahoo!Finance. Jeff holds a FINRA Series 65 Investment Advisor License.

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