(Bloomberg) — Thanks to the pandemic, U.S. banks won a long-sought regulatory break that let them expand their balance sheets by as much as $600 billion without adhering to profit-denting safeguards. Now, firms are frantically lobbying to extend that relief before it expires at month’s end.The reprieve from what’s known as the supplementary leverage ratio — granted a year ago as Covid-19 rocked markets and the economy — gave lenders free rein to load up on Treasuries and deposits, while avoiding a requirement that they hold more capital as a buffer against losses. The Federal Reserve and other agencies eased the rules because they said they wanted excess capital deployed to struggling businesses and households.As watchdogs mull letting the relief continue, Wall Street isn’t shying away from offering arguments and even warnings. Executives point out that the pain from coronavirus is far from over, and JPMorgan Chase & Co. has cautioned that it might have to shun customer deposits if tougher rules are reinstated. Analysts have also said recent bouts of wild trading in the $21 trillion Treasury market could be tied to concerns that banks will be forced to hold less government debt, even selling some of their holdings.“We estimate the potential for about $200 billion in Treasury selling, with the potential for it to be even larger,” said BMO Capital Markets strategist Dan Krieter. He added that the outlook remains “extremely uncertain” because it’s not clear what banks’ capital demands will be going forward.The lobbying has put the Fed at the center of a political firestorm, one of its first tests in the Biden era of seeking to support a fragile economy while fending off attacks from Democrat lawmakers who oppose any backpedaling on regulations adopted after the 2008 financial crisis. Progressive Senators Elizabeth Warren and Sherrod Brown have already fired a warning shot about doing the banks’ bidding.Pressuring PowellMeanwhile, Republicans repeatedly pressed Fed Chairman Jerome Powell at recent congressional hearings with industry-encouraged requests to grant an extension. Powell responded that the Fed hasn’t decided what to do, and the regulator has continued to decline to comment on its plans.The issue is weighing on lenders, with the KBW Bank Index slipping as much as 3.2% Tuesday after Goldman Sachs Group Inc. analysts said less excess capital may be available for distribution to shareholders if the break isn’t preserved. The supplementary leverage ratio — one of the key responses to the 2008 crisis — limits banks’ indebtedness by measuring the amount of capital they have standing against all their assets. When regulators relaxed the requirement last April, disruption in Treasuries was a major factor in their decision. The move allowed banks to help stabilize that market, while maintaining funding for short-term borrowing arrangements known as repurchase agreements.“The market has assigned almost mythical powers” to the temporary capital break, said Mark Cabana, head of U.S. interest rates strategy at Bank of America. In reality, he argued, the impact probably hasn’t been that significant because banks’ share of the demand for Treasuries is “very marginal.”Without incurring extra capital costs, the relief enabled the largest banks to pile up about $400 billion in reserves created from the Fed’s ongoing asset purchases and $200 billion in Treasuries, BMO’s Krieter estimated in a client note.The Fed has indicated that it intends to continue its asset buying, and those who want the break extended argue that continued economic stimulus will lead to a flood of new issuance, meaning it’s a bad time to deter banks from buying more Treasuries.“If that were to wane this year, when supply issues are likely to be worse, I think it could be problematic,” said NatWest Markets strategist Blake Gwinn.Fed’s FactorsFactors the Fed is likely to consider include whether the threat to the economy is as urgent as it was a year ago and the message it sends when regulators are seen as kowtowing to Wall Street. Also, the leverage ratio is an international agreement struck between global watchdogs, meaning overseas banks have a legitimate gripe that their U.S. counterparts are benefiting from less aggressive oversight.In pushing for an extension, Wall Street lobbyists have conducted a campaign of blog posts, research and letter writing. They’ve also homed in on one argument that regulators might be receptive to: banks needed the relief to respond to a dilemma that the federal government created.All the stimulus programs rolled out last year flooded corporations and consumers with cash that they had to store somewhere. That happened as companies — scared by the pandemic — were also drawing down credit lines that needed a home. Banks’ domestic deposits rose by 23% to $16.3 trillion in 2020 from 2019 and lenders had to invest the funds in Treasuries and other low-risk assets. So relaxing bank capital requirements for deposits and Treasuries was a natural reaction to the deluge.JPMorgan Chief Financial Officer Jennifer A. Piepszak said last month that “all of the major banks” are concerned about the relief going away. If it does, “we could turn away deposits,” she said.The Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency also have a say in whether banks are granted an extension. But FDIC Chairman Jelena McWilliams believes the relaxed capital demands have been the most meaningful for the bank holding companies the Fed oversees, according to an agency spokeswoman.The OCC is currently led by acting comptroller Blake Paulson, an agency veteran, though Treasury Secretary Janet Yellen has the authority to name anyone she wants to run the regulator. An OCC spokesman declined to comment on the agency’s plan.(Updates with bank stocks slipping in seventh paragraph.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.