Lucas Supports the Treasury Market Through Capital Reforms

Washington, DC – Today, the Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity held a hearing entitled, “Examining Primary Dealers and Balance Sheet Constraints“.

As Chair of the Task Force, Congressman Frank D. Lucas (OK-03) opened the hearing by highlighting needed reforms to regulatory burdens that primary dealers face as they intermediate the Treasury markets.

REMARKS AS PREPARED:

“Our market structure relies on primary dealers to ensure steady demand for the nation’s debt and the effective implementation of monetary policy. 

Capital requirements such as Basel III, the G-SIB surcharge, and risk-insensitive leverage ratios have undermined primary dealers’ intermediation capacity. Robust participation from intermediaries in the Treasury market is essential to the markets’ ability to function well amidst stress and volatility.

Congress must continue to evaluate the health of the market particularly as the capacity to intermediate does not grow commensurate with the government’s ever-growing issuance of debt.

Market disruptions in 2014, 2019, and 2020 demonstrate the need to examine and re-evaluate the limitations and constraints regulations may inadvertently put on the Treasury market… I was pleased to see the Fed finally adjust the enhanced supplementary leverage ratio to remove the disincentive for banks to engage in low-risk activities such as holding Treasuries, but more is yet to be done. 

Capital regulations may need adjustment to properly recognize treasuries as nearly risk-free assets, particularly as liquidity regulations require an increase in the volume of these liquid assets banks are holding.

Other leverage ratios, such as the supplementary leverage ratio and tier one leverage ratio, may also need to be adjusted to increase balance sheet capacity and ensure they function as intended: a backstop to risk-weighted capital requirements, not a binding constraint on intermediation.

I also continue to agree with Governor Miran – excluding treasuries and reserves from the SLR and e-SLR would help insulate the Treasury market from potential disruption during periods of market stress.” 

Click here or on the image above to watch his opening remarks.

WITNESSES: Ms. Susan McLaughlin, Executive Fellow, Yale School of Management Mr. James Tabacchi, Chairman, Independent Dealers & Trading Association Ms. Laura Klimpel, Managing Director, and Head of DTCC’s Fixed Income and Financing Solutions Dr. Haoxiang Zhu, Gordon Y. Billard Associate Professor of Managements and Finance, MIT Sloan School of Management BACKGROUND: The Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity was created at the beginning of the 119th Congress. The Task Force is charged with examining issues related to monetary policy, the fundamental role that U.S. Treasury debt plays in the economy, and the resilience of the Treasury market. The Task Force will also examine the Federal Reserve Act and how economic growth and price stability affect the financial wellbeing of all Americans. You can find more information on the Task Force here. ###