WASHINGTON – The Federal Reserve said on Friday it would allow a one-year deferment of how big banks account for ultra-secure assets like Treasury bills as planned at month-end, a loss for Wall Street companies who had called for an extension of relief.
The decision means that banks will lose the temporary possibility to exclude treasury bills and deposits with the central bank from the so-called additional leverage ratio of lenders. The ratio measures capital – funds that banks collect from investors, earn through profits, and use to absorb losses – as a percentage of loans and other assets. Without the exclusion, treasuries and deposits count as assets.
The Fed said it would soon propose longer-term changes as a rule to address the treatment of ultra-secure assets.
“Due to recent growth in the supply of central bank reserves and the issuance of Treasury bonds, over time the board of directors may need to address the current design and calibration of the SLR to avoid developing tensions that could both impact economic growth. limit as can undermine financial stability. , The Fed said in a statement.
The Fed stressed that overall capital requirements for large banks would not fall.
Jerome Powell, chairman of the Federal Reserve, tells WSJ’s Nick Timiraos that there is no plan to raise interest rates until labor market conditions are consistent with maximum employment and inflation is sustained at 2%. (First published 3/4/2021) Photo: Eric Baradat / Agence France-Presse / Getty Images.
The central bank passed the temporary lockout a year ago in an effort to boost credit flow to cash-strapped consumers and businesses and ease the treasury market tensions that erupted when the coronavirus hit the U.S. economy. The market has since stabilized.
Banks and their industry groups had pushed for an extension of the relief, saying that without it, banks would withdraw significantly from Treasury purchases, adding to the upward pressure on bond yields that has troubled the markets in recent weeks.
They warned that some companies could get close to violating capital requirements in the coming months. To avoid that, they could be forced to buy less Treasury bills or forgo customer deposits, the banks said.
As a result, the banks would play a smaller role as intermediaries in the Treasury market, or they would hold fewer deposits – which they use to buy or park Treasury bills as Fed reserves – much like Congress fired a $ 1.9 trillion emergency. that could bring in an additional $ 400 billion in stimulus payments on deposits and lead to more loans from the federal government, analysts say.
Senior Democrats such as Senate Banking Committee Chair Sherrod Brown of Ohio and Senator Elizabeth Warren of Massachusetts said before the Fed’s decision that an extension of the Enlightenment would be a “grave mistake” that would become the post-crisis regulatory regime impaired.
“There is strong opposition in Congress to easing bank regulation,” Roberto Perli and Benson Durham of Cornerstone Macro, an investment research firm, wrote before the Fed’s announcement.
Major US banks must hold capital equal 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 over-lending without increasing their level of capital.
The banks are running on gigantic stocks of cash, US sovereign debt and other safe assets. By adjusting the way the ratio is calculated last year, the Fed was effectively trying to secure a swap. Eliminate treasury and central bank deposits from the calculation, the thought went, and banks should be able to replace them in the asset pool with loans to consumers and businesses.
It is unclear whether that happened. According to Barclays research based on data from Federal Deposit Insurance Corp. US lenders saw their loan portfolios grow by about 3.5% last year, the slowest rate in seven years.
Write to Andrew Ackerman at [email protected]
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