Saturday, May 5, 2018

Fed Speech

Revealing speech from Fed's Quarles yesterday (of course at Hoover! Can't even make it up... LOL!), imo must read for us.  Some pretty good news on the pace of the QE reversal for this year and next and also reveals how Fed policy can effect asset composition at the depositories...

The figure illustrates that the Fed's securities holdings are projected to decline about $400 billion this year and another $460 billion next year as Treasury and agency securities continue to roll off gradually from the Fed's portfolio. 
We had initially calibrated the leverage ratio at a level that caused it to be the binding constraint for a number of our largest banks. As a result, those banks had an incentive to add risk rather than reduce risk in their portfolios because the capital cost of each additional asset was the same whether it was risky or safe, and the riskier assets would produce the higher return. The proposed recalibration eliminates this incentive by returning this leverage ratio to a level that is a backstop rather than the driver of decisions at the margin. Yet, because of the complex way our capital regulations work together--with risk-based constraints and stress tests regulating capital at both the operating and holding company levels--this improvement in incentives is obtained with virtually no change in the overall capital requirements of the affected firms.

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