If you think the world of high finance is just for Wall Street insiders, think again. A major shift is happening in the U.S. banking system—one that could lower your mortgage rates, boost the stock market, and potentially re-ignite inflation.
In a recent deep-dive video, financial analyst Joe Brown of Heresy Financial broke down the mechanics of a looming bank deregulation move. The focus? A little-known but powerful rule called the Supplementary Leverage Ratio (SLR).
To understand where we are going, we have to look at where we’ve been.
Following the 2008 financial crisis, regulators implemented the SLR to prevent banks from taking on too much risk. The rule is simple: banks must hold a minimum amount of capital against their total assets.
However, the SLR has a quirk: it doesn’t distinguish between risk.
Under this rule, a bank is required to hold just as much capital against a “risk-free” U.S. Treasury bond as it would against a risky corporate loan or a volatile asset. This blanket approach acts as a brake on banks, limiting how much they can lend and how much government debt they can hold.
We saw exactly how powerful this lever is during the onset of the C***D-19 pandemic in 2020. As markets panicked and liquidity dried up, the Federal Reserve made a bold move: they temporarily suspended the SLR.
The result? Banks were free to buy U.S. Treasuries and lend to businesses without regulatory handcuffs. This i*******n of liquidity helped stabilize government debt yields and kept credit flowing. However, the suspension was temporary. When it expired in 2021, banks immediately pulled back, shrinking their balance sheets and tightening financial conditions.
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Fast forward to today, and the pressure is mounting again—but for a different reason. The U.S. national debt is approaching a staggering $39 trillion, with annual deficits continuing to grow.
The government has a massive borrowing need. They need banks to buy Treasury bonds to finance this debt at a manageable cost. But the SLR is currently standing in the way.
According to Joe Brown, the Federal Reserve and the Treasury are likely looking to roll back or permanently suspend the SLR again. This would be a form of bank deregulation designed to grease the wheels of the financial system.
So, what happens if the SLR is relaxed?
1. Lower Borrowing Costs: By allowing banks to hold more government debt and make more loans without holding extra capital, the supply of credit should increase. Basic economics tells us that when supply goes up, the price (in this case, interest rates) tends to come down. This could mean cheaper loans for businesses and consumers.
2. Economic Stimulus: More lending means more capital for businesses to expand, hire, and innovate. This could provide a significant boost to economic growth.
3. The Inflation Risk: There is a catch. When you unleash banks to create more credit, you are essentially expanding the money supply. Joe Brown notes that this “financial engineering” could lead to higher inflation.
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However, he also points out a potential counterbalance: if that new lending is used to finance productivity enhancements (like new technology or infrastructure), it expands the real economy. A larger real economy can absorb more money without prices spiraling out of control. It’s a delicate balancing act.
While deregulation can solve financial bottlenecks, Joe warns that it cannot solve physical ones.
Even if banks have the regulatory freedom to lend trillions of dollars, the economy is still bound by physical constraints. Shortages of energy, raw materials, and labor could limit how fast the economy can grow, regardless of how cheap money becomes.
The potential rollback of the SLR is a signal that the government is prioritizing liquidity and debt management. While this could be a boon for asset prices and economic activity in the short term, it introduces risks regarding inflation and long-term financial stability.
As Joe Brown emphasizes, these changes are likely to be coordinated between the Federal Reserve and the Treasury, and they could happen sooner than you think.
For a deeper analysis of how to position your portfolio for these shifts, including a strategy for profiting from the commodities sector, check out the full video from Heresy Financial.
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