By Andrew Ackerman
WASHINGTON – The Federal Reserve said it was ending a year-long rebate that had reduced capital requirements for major banks, much to the disappointment of Wall Street companies that had lobbied for expansion.
Friday’s decision means banks will lose their temporary ability to ban Treasurys and central bank-held deposits from lenders ’leverage ratio. The ratio measures capital – money that banks raise from investors, earn through profits and use to accept losses – as a percentage of loans and other assets. Without the ban, Treasurys and investments count as assets. This may force banks to retain more capital or reduce their holdings of these funds, which could both go through markets.
Analysts have been monitoring the issue, which is widely seen on Wall Street as affecting markets from bonds to stocks to commodities.
Some analysts had warned that a sunset release could add to market volatility of $ 21 trillion for U.S. government bonds at a time when Wall Street is worried that the spread of heavy debt would pay off For federal incentive spending and other Biden administrative priorities boosting the 2021 increase in Treasury yields.
But the Fed said it would consider a broader update to the rules and banks are not expected to change their activity immediately, affecting market response on Friday. The yield on Finance’s 10-year note was virtually unchanged at noon on Friday, as were the major stock indices.
“This is not a disastrous outcome, but it is not as good in our opinion either,” said Krishna Guha, vice chairman of Evercore ISI, an investment banking consulting firm.
The Fed said they would soon consider ways to rebalance the leverage ratio and the handling of ultrasound funds. In the absence of more permanent changes, banks may over time encourage incentives to load more risky loads, as the risk-insensitive ratio means that it handles ultrasound funds the same way. something to junk bonds, Fed officials told reporters.
“As a result of recent growth in the provision of central bank reserves and the removal of Treasury securities, the board may need to address the current design and capitalization of the SLR over time to prevent overlapping. from development that could impede economic growth and weaken financial sustainability. , “the Fed said in a statement.
The Fed confirmed that overall capital requirements for large banks would not decline following any rebalancing.
Large lenders do not oppose a cut that is close to March 31, when the exemption ends, as their capital levels are not so close to the threshold that the changes will force them to board, major bank officials said.
Instead, lenders will have time to see how the Fed’s current market interventions play out and how buyers react to their investments over the summer months, when the economy is expected to recover quickly.
They also monitor management guidance on what the permanent changes would be, and how quickly they could be replaced, before making major changes to their own work, one said. executive officer. The possibility of a permanent solution was seen as positive because it means that the worst problems are likely to be avoided, the person said.
Banks have a range of levers that they can pull as they get close to their capital levels, but it will depend on where the pressure is on their balance sheets.
One of the most likely moves, and one they have used in years after the 2008 financial crisis, is to threaten some large corporate investors with fees to park their money. The investments that the banks have flooded over the past year are unprofitable for banks and are considered too short to lend. To solve the problem, the banks could threaten negative interest rates on these deposits in an attempt to remove them.
Called their quarterly conference with analysts in January, JPMorgan Chase & Co. officials said warning that they could be forced to push clients away, take out new debts or reduce shareholder payments if the Fed does not extend the relief.
“Remember, we were able to reduce $ 200 billion of investments in months like last time,” CEO Jamie Dimon said on the call. “But we don’t want to do it. It’s just very customer-friendly to say ‘try to take your investments elsewhere.”
The central bank adopted the temporary ban a year ago in a bid to increase the flow of credit to consumers and businesses with cash and to ease rows in the Treasury market that exploded when the coronavirus hit an economy in the US. The market has calmed down ever since.
Treasury revelations have skyrocketed with federal government deficits since the outbreak began, as businesses across the country closed and millions of workers were shut down, and the government raises spending to slow down the economy and fight the coronavirus.
The Congressional Budget Office last week predicted a deficit for the current fiscal year to $ 2.3 trillion, nearly a trillion dollars less than the gap for last year’s position, but more than officials expected in September.
Friday’s decision became more complicated for the Fed after the issue became more of a partisan fight.
Senior Democrats as Senate Banking Committee Chairman Sherrod Brown of Ohio and House Financial Services Committee Chairman Maxine Waters (D., Calif.) Said before the Fed’s decision that extending the error relief, would weaken the system post-emergency management. Republicans were usually pushing for expansion.
Major U.S. banks are required to maintain capital equal to at least 3% of their total assets, including loans, investments and real estate. By keeping banks to a minimum, regulators effectively restrict them from over-lending without raising their capital levels to deal with potential losses.
The banks are sitting on huge piles of money, US government debt and other safe-haven assets. By tweaking how the ratio was calculated last year, the Fed was effectively trying to make an exchange. Remove Treasurys and central bank deposits from the calculation, they were thought, and banks should be able to lend to consumers and businesses.
U.S. lenders saw their loan books go up about 3.5% last year, the slowest pace in seven years, according to a study from Barclays using Federal Investment Insurance Corporation data.
Write to Andrew Ackerman at [email protected]
(END) Dow Jones Newswires
19 March 2021 15:30 ET (19:30 GMT)
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