Regulators expect to block bank capital regulations enacted early in the pandemic at the end of the month, which could encourage further volatility in the bond market. The rule could also hurt some bank stocks.
The ban had a bank capital requirement associated with a metric known as the supplementary leverage ratio (SLR). Banks have been required to maintain a certain amount of capital for their overall balance and to be offset. But when bank balance sheets exploded in early 2020, regulators allowed banks to ban deposits held at the Federal Reserve and U.S. treasury notes from their full bare distribution.
The closure was intended to ensure that banks did not get too close to their SLR regulatory thresholds and were not deterred from lending through the pandemic. The move also helped calm Financial markets following a massive sale of pounds early in the pandemic.
Without the exclusion, some worry that banks could sell some of their Financial notes, pushing for higher long-term bond yields, which has been a key headache for a good chunk of the market .
The only clear point for banks is that the Fed says it intends to seek views on measures to change the SLR, which banks have long been lobbying for.
The SLR is a measure of capital adequacy for all leverage distributions both on and off a bank balance sheet. It was implemented after the major recession after the bank benefited from the balance sheet through things like derivatives affecting the global banking system.
The SLR is measured by the apportionment of a bank’s tier 1 capital, such as share equity and retained earnings, by its full spread distribution, which includes total assets and all off-balance sheet items such as derivatives . Most banks are required to maintain an SLR above 5%.
Many bank executives have argued that the SLR is not a good measure because it is not based on risk.
The main reason banks saw the overall increase in turnover in early 2020 was due to a flood of investments into the banking system, which increased assets and thus reduced leverage. But investments don’t usually make banks ’balance sheets more risky.
The end of the ban could hurt some large banks such as Chase JPMorgan (NYSE: JPM). At the end of 2020, JPMorgan had an SLR of 6.9% with the shutdown in place. Without it, the bank would have had an SLR of 5.8%. Not all banks are affected so much – officials at Bank of America (NYSE: BAC) stated that they will not run into any SLR cases if the shutdown runs out.
JPMorgan CFO Jennifer Piepszak said on the bank’s last employment call that if the SLR ban runs out, the bank may have to consider reducing or turning away deposits, issuing preferred stocks, or maintaining a more common balance than the bank would normally require. .
Shares of JPMorgan were down as much as 4% on Friday before ending the day down 1.6%.
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