US dealers’ leverage adequacy hits two-year high on repo compression

Lower repo exposures freed up capacity for derivatives and off-balance sheet items in third quarter

US systemic dealers bolstered their leverage buffers to the highest level in more than two years during the third quarter, as lower repo activity offset a hike in exposures for derivatives and off-balance sheet assets.

The eight US global systemically important banks (G-Sibs) reported an aggregate supplementary leverage ratio (SLR) of 6.1% at end-September, up nine basis points on end-June and the highest since Q1 2021’s 7%.

 

While the rise was primarily driven by growth in the banks’ collective Tier 1 capital – the SLR’s numerator – to a record $1.05 trillion, the ratio was also helped by a compression in exposures at the denominator, led by repo activity.

Repo exposures – stemming primarily from reverse repo assets, netted against same-counterparty repo liabilities – dropped by $94.2 billion, falling just below $2 trillion for the first time in two years.

Morgan Stanley stood out for reducing the component $36.5 billion or 13.3% – by far the most of the group in both absolute and percentage terms.

State Street was the only dealer whose SLR’s repo component rose, by $745 billion or 2.4%, due to a reduced netting benefit.

 

The drop in repos, coupled with a $31 billion cut to other on-balance sheet exposures, outweighed aggregate rises of $50.7 billion from derivatives exposures and $40.9 billion from off-balance sheet assets.

The ultimate quarter-on-quarter increases to the SLRs ranged from 2bp at Wells Fargo to 20bp at Bank of America.

BNY Mellon, with an SLR of 7.24%, retained the plumpest buffer to the 5% minimum. Conversely, Morgan Stanley’s 5.5% ratio was the closest to requirements.

What is it?

The SLR is a US-specific requirement that sits next to the Basel III Tier 1 leverage ratio. It is calculated as Tier 1 capital divided by total leverage exposure. Systemic US bank holding companies and the intermediate holding companies of foreign banks must maintain minimum SLRs of at least 3% to be in compliance with the rule.

US G-Sibs are also subject to an additional buffer requirement of 2%, making their all-in minimum threshold 5%.

Why it matters

As volatility fuelled dealers’ derivatives exposure – whether in the trading book or for own-book hedging – cuts to the SLR’s repo component may have offered the most immediate way to build the necessary leverage headroom. How each lender went about it, however, hints at different dynamics at work.

BNY Mellon and Citi, for instance, kept a lid on repo exposures – despite growing gross balances – by netting more of them against repos with the same counterparty. In contrast, Goldman Sachs, JP Morgan and Wells Fargo acted by cutting reverse repo exposures outright.

Only Bank of America and Morgan Stanley cut gross reverse repo assets while also offsetting more of them – essentially meaning a larger proportion of the book underwent netting.

It’s an open question whether dealers’ repo books will maintain that kind of elasticity going forward. On the one hand, the Fed’s quantitative tightening is inducing ever-lower usage of its reverse repo facility, inevitably reshaping demand in other repo channels.

On the other hand, an upcoming rule mandating central clearing of US Treasury repos means that, in principle, all of a dealer’s Treasury reverse repos and repos will net each other. This could lower exposures on a running basis, but also leave dealers with no room to boost the SLR by dialling up netting when needed – leaving book cuts as the only emergency lever they can pull to bolster leverage buffers.

Explore our data

Readers of Risk Quantum now have access to some of the datasets that sit behind our stories – not just the segment of data that is the focus for the story, but the full time series, for the full population of covered firms. Readers can choose the institutions they want to look at, the metrics they are interested in, and download the data in CSV format to run their own comparisons and build their own charts. Risk and capital managers told us it would be helpful for internal reporting and benchmarking, but we figured many of our readers might get something out of it. 

Currently, the available data covers more than 120 banks and over 100 risk and capital metrics, but we’ll be adding more throughout the year. The Risk Quantum database can be found here. The full list of data points currently available can be found here.

Get in touch

Like Risk Quantum? Sign up for free to our daily newsletter and check @RiskQuantum for the latest updates. 

If you have any thoughts on our latest analysis or want to suggest other ways to present and analyse the data, you can email us.

Tell me more

Morgan Stanley grows overnight and open repos as rivals retreat

How repo roll risk could spoil US Treasury basis trade

Market ‘not ready’ for US Treasuries clearing mandate

Quarles calls for SLR ‘recalibration’ to support Treasuries

View all bank stories