Here is a chart of how the bank has to account for a deposit:
So the left side entry is an increase in an asset account for the bank; and accordingly, the bank has to include any increase in total assets in its computation of its regulatory Leverage Ratio; ie capital/assets.
So in periods where tax revenue increases to the point of surplus, when Treasury elects to maintain those surplus USDs in depository accounts "to earn some interest for the taxpayers!" instead of in the non-interest bearing General Account, it will create a credit contraction as the system is experiencing an increase of these types of assets and will have to reduce or negate other forms of asset creation in order to maintain the fixed Leverage Ratio.
This is why periods of fiscal surplus have typically been short lived as the in flood of Treasury deposits into the banking system soon drives depositories into violation of the Leverage Ratio and a resultant immediate deleveraging in the other asset categories.
Since the GFC, Treasury has not elected to move their surplus USDs into depository accounts rather they seem content to leave then in the General Account which has eliminated these negative effects of any short term fiscal surpluses that have been occurring.
So we are seeing a continuation of economic growth to somewhat record duration of time as this policy is continued and the metaphor brigade is left wondering "when the punch bowl is going to be removed?!".
Also, the Trump 2018 tax cuts are timely as they (should?) reduce the likelihood of fiscal surplus any time soon; so that may help this year also as the TGA should be maintained at lower levels and the potential for significant government transfer of surplus USDs into deposit accounts is reduced.
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"So the left side entry is an increase in an asset account for the bank; and accordingly, the bank has to include any increase in total assets in its computation of its regulatory Leverage Ratio; ie capital/assets."
Leverage Ratio requirements were introduced in 2014. The Basel Capital Ratio does not require capital for cash assets (as cash has 0% risk weight).
"Since the GFC, Treasury has not elected to move their surplus USDs into depository accounts". Hence, leverage ratio was never a problem...
Andre look into the Supplementary Leverage Ratio... it includes both risk and non-risk assets... you are talking about the Capital Adequacy Ratio which doesn’t include non-risk ... there are 2 regulatory ratios ....
Also, your statement assumes the depositories do not have their own internal controls which exceed the statutory minimums...
Here:
https://www.occ.treas.gov/news-issuances/bulletins/2014/bulletin-2014-47.html
“The supplementary leverage ratio is the ratio of a banking organization’s tier 1 capital to its total leverage exposure, which includes all on-balance-sheet assets and many off-balance-sheet exposures.”
It includes the non-risk assets...
There are TWO: the CAR and the SLR...
"Banking organizations subject to the supplementary leverage ratio requirements are required to calculate and publicly report their supplementary leverage ratios beginning in the first quarter of 2015. The minimum supplementary leverage ratio requirements are not effective until 2018."
Since 2015 there are two requirements (actually, there are four: core capital ratio, tier I capital ratio and the usual basel capital ratio, and recently the Leverage Ratio).
There was not Leverage Ratio before (the one that assumes that all exposures have 100% risk weight). It is new.
Before there were the risk weighed exposures, and cash had always 100% risk weights.
Don't know if depositors have their own statutory minimums. That isn't common in my country.
*cash had always 0% risk weights
“Since the GFC, Treasury has not elected to move their surplus USDs into depository accounts rather they seem content to leave then in the General Account which has eliminated these negative effects of any short term fiscal surpluses that have been occurring.”
QE eliminates the need for treasury to keep funds in deposit accounts, the purpose of which is to facilitate banks meeting reserve requirements at the margins. QE makes banks flush with reserves.
Here is JPMs internal LR they maintain... I would say they have a goal to maintain it at a set point of 8.25...
https://csimarket.com/stocks/singleFinancialStrength.php?code=JPM&Le
They transfer or leave USD balances into the deposit accounts to earn deposit interest for the taxpayers... deposit interest has been ZIRP since GFC so they have no use for the deposit accounts... although bank deposit rates have been creeping up of late...
There is like 200b in the TGA now if Mnuchin were to go in Monday and direct his people to transfer 175 into deposit accounts to earn some interest for the taxpayers the whole system would crash again...
Leverage Ratio
Fundamental Analysis Term
A financial strength ratio that measures proportion of company's Total Liabilities to Stockholder's Equity. Leverage Ratio displays company's indebtedness and the leverage of Stockholder's Equity. The number indicates how much company owes of Total Liabilities for one dollar of stockholder's equity. The lower the number, the stronger the balance sheet of the company.
Then look at JPMs in the link above at 8.25 +/- 0.1 all the time and what do you guys think that constant 8.25 evolves from the apes by random chance mutation? Or are personnel working to put it there?
Yes, Leverage Ratio does bring capital requirements to banks holding treasuries. My point is that there was no such requirement before 2014. It is new.
And yes, it is a problem, as banks do complain a lot about it.
However, the requirement is relative small (usually 3% to 5% depending on the country). It means that even if a bank holds all of its assets in treasuries, it will need to keep just 3% of shareholder equity (or other instruments defined as capital).
That's not the end of the world, even if it didn't make much sense.
If banks are complaining, that's because they are incredible leveraged...
They are currently complaining because with the Fed QE policy, it is requiring them to hold an additional 400B of capital above what they need to support the risk assets ... and that is with zero in the deposit accounts...
also what is preventing the Fed from ever doing the same thing and crashing the whole system ever again? Mnuchin could walk in tomorrow and deposit all the USD from the TGA into the deposit accounts and bring the whole thing crashing down again..
.... and It leads to instability... if you go back to the late 90s and look at the Treasury deposits when we ran the surpluses they could quickly go up from 0 to 50B in a few weeks...
When do banks ever add 50B of risk assets in a few weeks back then? They are not set up for that kind of thing... these morons caused the whole Russian default with those surpluses when banks had to pull the Russian USD funding in response to spiking in the TTL deposit accounts...
They are all idiots...
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