WASHINGTON – The Federal Reserve said Friday it would allow a year-long postponement of the way large banks are responsible for ultra-curved assets such as security bonds scheduled for the end of the month, a loss for Wall Street businesses that insisted the relief.
The decision means that banks will lose the temporary ability to exclude Treasurys and deposits held at the central bank from the so-called supplementary leverage ratio. The ratio measures capital – funds that banks raise from investors, earned through profit and used to absorb losses – as a percentage of loans and other assets. Without the exclusion, Treasurys and deposits count as assets.
The Fed has said it will soon propose long-term changes to the rule to address the handling of ultra-safe assets.
‘Due to the recent growth in the supply of central bank reserves and the issuance of treasury bonds, the board will have to deal with the current design and calibration of the SLR over time to prevent tensions from developing that could limit economic growth and financial stability. undermine. “The Fed said in a statement.
The Fed emphasizes that the total capital requirements for large banks will not fall.
Federal Reserve Chairman Jerome Powell tells WSJ Nick Timiraos that there is no plan to raise interest rates until labor market conditions are in line with maximum employment and inflation is sustainable at 2%. (First published on 3/4/2021) Photo: Eric Baradat / Agence France-Presse / Getty Images.
The central bank adopted the temporary exclusion a year ago in an effort to boost credit flows to cash-strapped consumers and businesses and ease tensions in the treasury market that erupted when the coronavirus hit the U.S. economy. The market has since stabilized.
Banks and their industry groups have insisted on expanding the relief, saying without it banks could significantly withdraw from Treasury purchases, which will contribute to the upward pressure on bond yields that has plummeted on markets over the past few weeks.
They warned that some businesses without the relief could exceed capital requirements in the coming months. To prevent this from happening, they could be forced to buy less treasury or shy away from customer deposits, the banks said.
This would allow banks to play a smaller role if intermediaries in the Treasury market or hold fewer deposits – which they use to buy Treasurys or park as Fed reserves – just when Congress has a $ 1.9 billion relief bill accepted that an additional $ 400 billion in Analysts say they will stimulate payments into deposit accounts, leading to more loans from the federal government.
Senior Democrats, such as the chairman of the Senate Banking Committee, Sherrod Brown of Ohio, and Senator Elizabeth Warren of Massachusetts, said before the Fed’s decision that an extension of the relief would be a ‘serious mistake’, the crisis would weaken.
“Opposition in Congress to relaxing banking regulation is strong,” Roberto Perli and Benson Durham of Cornerstone Macro, an investment research firm, wrote ahead of the Fed’s announcement.
Major US banks must maintain capital equivalent to at least 3% of all their assets, including loans, investments and real estate. By keeping banks to a minimum ratio, regulators effectively restrict them from taking out too many loans without raising their capital levels.
The banks are sitting on large stocks of cash, US government debt and other safe assets. By adjusting how the ratio is calculated last year, the Fed effectively tried to design an exchange. Remove Treasurys and central bank deposits from the calculation, and the banks must be able to replace them in the asset pool with loans to consumers and businesses.
It is unclear if this happened. U.S. lenders boosted their loan books by about 3.5% last year, the slowest pace in seven years, according to research by Barclays, which used data from Federal Deposit Insurance Corp.
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