WASHINGTON – The Federal Reserve said Friday it will allow a year-long deferral of how large banks account for ultrasound assets, such as treasury government bonds, to expire at the end of the month, a loss for Wall companies. Street that requested an extension of relief.
The decision means that banks will temporarily lose the ability to exclude treasuries and deposits held with the central bank from the so-called supplementary leverage ratio of creditors. The report measures capital – the funds that banks raise from investors, earn from profits and use them to absorb losses – as a percentage of loans and other assets. Excluding treasuries, treasuries and deposits are considered assets.
The Fed said it would soon propose longer-term changes to the rule to address the treatment of ultrasound assets.
“Due to the recent increase in the central bank’s supply of reserves and the issuance of treasury securities, the council may need to address the current design and calibration of the SLR over time to prevent the development of strains that could constrain economic growth and could undermine financial stability, “the Fed said in a statement.
The Fed stressed that the general capital requirements for large banks will not decrease.
Federal Reserve Chairman Jerome Powell tells WSJ Nick Timiraos that there are no plans to raise interest rates until labor market conditions are in line with maximum employment and inflation is 2% . (First published 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 without money and to ease tensions in the Treasury market that erupted when the coronavirus hit the US economy. The market has stabilized since then.
Banks and their industry groups have been pushing for an extension of the exemption, saying that without it banks could withdraw significantly from Treasury acquisitions, adding to upward pressure on bond yields that have shaken markets in recent weeks.
They warned that without the exemption, some companies could be close to violating capital requirements in the coming months. To prevent this from happening, they could be forced to buy fewer Treasuries or avoid customer deposits, banks said.
This would allow banks to play a smaller role as intermediaries in the Treasury market or hold fewer deposits – which they use to buy Treasuries or park as Fed reserves – just as Congress passed an exemption bill. $ 1.9 trillion that could push an additional $ 400 billion in stimulates payments into deposit accounts and lead to more federal government loans, analysts say.
Senior Democrats, such as Senate Banking Committee Chairman Sherrod Brown of Ohio and Sen. Elizabeth Warren of Massachusetts, said before the Fed’s decision that extending the aid would be a “serious mistake,” weakening the post-crisis regulatory regime.
“Opposition in Congress against easing banking regulations is strong,” Roberto Perli and Benson Durham of Cornerstone Macro, an investment research firm, wrote before the Fed’s announcement.
Large US banks must 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 lending too much without raising their capital levels.
Banks stand on gigantic stocks of cash, US government debt and other secure assets. By changing the way the report is calculated last year, the Fed actually tried to make a swap. Eliminate the central bank’s treasuries and deposits from the calculation, the thinking has gone, and banks should be able to replace them in the asset fund with loans to consumers and businesses.
It is not clear if this happened. U.S. lenders have seen their credit cards rise by about 3.5 percent last year, the slowest pace in seven years, according to research by Barclays using Federal Deposit Insurance Corp. data.
Write to Andrew Ackerman at [email protected]
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