WASHINGTON – The Federal Reserve said on Friday that it would allow a one-year extension to the way large banks book ultra-secure assets, such as Treasury bills, to expire as scheduled at the end of the month, a loss for Wall Street companies. who pushed for an extension for relief.
The decision means that banks will lose their temporary ability to exclude Treasury bills and deposits held at the central bank from the so-called supplementary leverage index of creditors. The index measures capital – funds that banks raise from investors, earn through profits and use to absorb losses – as a percentage of loans and other assets. Without exclusion, treasures and deposits count as assets.
The Fed said it will soon propose long-term changes to the rule to deal with the treatment of ultra-safe assets.
“Because of the recent growth in the supply of central bank reserves and the issuance of Treasury bills, the board may need to address the current design and calibration of the SLR over time to avoid the development of tensions that could restrict economic growth and undermine financial stability, ”the Fed said in a statement.
The Fed emphasized that the general capital requirements for large banks would not decrease.
Federal Reserve Chairman Jerome Powell told 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 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 increase the flow of credit to consumers and businesses in need of cash and to ease tensions in the treasury market that erupted when the coronavirus hit the United States economy. The market has since stabilized.
Banks and their industry groups have lobbied for an extension of the relief, saying that without it banks could backtrack significantly on Treasury purchases, which would increase the upward pressure on bond yields that has rocked the markets in recent weeks.
They warned that, without the relief, some companies may come close to violating capital requirements in the coming months. To prevent this from happening, they may be forced to buy fewer Treasury bills or avoid customer deposits, the banks said.
This would leave banks playing a lesser role as intermediaries in the Treasury market, or holding fewer deposits – which they use to buy Treasury bills or park as Fed reserves – just as Congress passed a $ 1 relief bill. , 9 trillion that could push an additional $ 400 billion in stimulating deposit account payments and lead to more federal government loans, analysts say.
Senior Democrats, such as Senate Banking Committee Chairman Sherrod Brown of Ohio and Senator Elizabeth Warren of Massachusetts, said before the Fed’s decision that an extension of the measure would be a “serious error”, weakening the post regulatory regime -crisis.
“Congressional opposition to loosening banking regulation is strong,” wrote Roberto Perli and Benson Durham of Cornerstone Macro, an investment research firm, before the Fed’s announcement.
Large US banks are expected to hold capital equal to at least 3% of all their assets, including loans, investments and real estate. By keeping banks at a minimum, regulators effectively restrict them from making many loans without increasing their capital levels.
Banks have gigantic stocks of cash, US government debt and other safe assets. By adjusting the way the index is calculated last year, the Fed was effectively trying to architect a swap. Remove Treasury and central bank deposits from the calculation, it was thought, and banks should be able to replace them in the asset pool with loans to consumers and businesses.
It is not clear whether this happened. American lenders saw their loan portfolios increase by about 3.5% last year, the slowest pace in seven years, according to Barclays research using data from the Federal Deposit Insurance Corp.
Write to Andrew Ackerman at [email protected]
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