WASHINGTON – The Federal Reserve said Friday it would allow a one-year amortization for the way large banks account for ultra-security assets, such as Treasury bonds, which will expire as planned at the end of the month, a loss for to Wall Street companies that had pushed for an extension to the relief.
The decision means that banks will lose the temporary ability to exclude central bank treasuries and deposits from the so-called supplementary leverage ratio. The ratio measures capital (funds that banks collect from investors, make profits, and use them to absorb losses) as a percentage of loans and other assets. Without exclusion, treasures and deposits count as assets.
The Fed said it would soon propose longer-term changes to the rule to address the treatment of ultra-secure assets.
“Due to the recent growth in the central bank’s supply of reserves and the issuance of Treasury securities, the board may need to address the current design and calibration of the SLR over time to prevent it from develop tensions that could limit economic growth and undermine financial stability, ”the Fed said in a statement.
The Fed stressed that general capital requirements for large banks would 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 consistent with maximum employment and inflation is sustainable at 2 %. (First published on 04/04/2021) Photo: Eric Baradat / Agence France-Presse / Getty Images.
The central bank adopted the temporary exclusion a year ago in an effort to increase credit flow to consumers and businesses with cash problems and to alleviate Treasury market tensions that erupted when the coronavirus affected the economy American. The market has stabilized since then.
Banks and their industry groups had pushed for an extension of the relief, saying that without this banks could withdraw significantly from Treasury purchases, which would add to upward pressure on bond yields that affected markets. the last few weeks.
They warned that without relief, some companies could end up failing to meet capital requirements in the coming months. To prevent this from happening, they may be forced to buy less cash or shy away from customer deposits, banks said.
This would allow banks to play a smaller role as intermediaries in the Treasury market or to have fewer deposits — which they use to buy treasures or park as Fed reserves — in the same way that Congress passed a bill. $ 1.9 trillion relief that could boost an additional $ 400 billion boost payments on deposit accounts and lead to higher federal government debt, analysts say.
Senior Democrats such as Senate Banking Committee Chair Sherrod Brown of Ohio and Sen. Elizabeth Warren of Massachusetts said before the Fed’s decision that extending the relief would be a “grave mistake.” would weaken the post-crisis regulatory regime.
“Opposition in Congress against easing banking regulation is strong,” wrote Roberto Perli and Benson Durham of Cornerstone Macro, an investment research firm, ahead of the Fed’s announcement.
Large 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, regulators effectively restrict them from making too many loans without raising their capital levels.
Banks are sitting on large stocks of cash, U.S. public debt and other safe assets. By modifying how the ratio is calculated last year, the Fed was effectively trying to design a swap. Remove the treasuries and deposits of central banks from the calculation, and banks should be able to replace them in the asset set by lending to consumers and businesses.
It is unclear if this happened. According to a Barclays investigation using data from Federal Deposit Insurance Corp., U.S. lenders saw their loans rise by about 3.5% last year, the slowest pace in seven years.
Write to Andrew Ackerman to [email protected]
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