Our evidence suggests that banks were arbitraging the SLR (and eSLR) rule by shifting from safer assets toward riskier, higher-yielding ones. Evidence from other studies we discuss point to the same behavior by banks or dealers with portfolios heavily weighted toward safe, low-yield assets as part of their business models. Policymakers are aware of this regulatory arbitrage and are addressing it.FRBNY — Liberty Street Economics
Leverage Rule Arbitrage
Dong Beom Choi, Michael Holcomb, and Donald P. Morgan
3 comments:
“If it chooses to reduce assets, the least costly option is to shed low-yielding assets, such as reserves. ”
Correct That’s why exchange rates then vary/adjust....
They exchange domestic reserves for foreign reserves via higher bids in the domestic currency in this manner and the exchange rate adjusts down ...
The other thing here that the author doesn’t consider is that the whole time in question here the Fed was adding trillions of reserves via the QEs.... banks have no option to not increase reserves under those conditions... and IOR was at zero .... so they increase risk assets as the operative ratio becomes the SLR under conditions where the CB is adding trillions of non risk assets...
Banks are tremendously overcapitalized from a risk ratio perspective...
Ask these 3: “do banks lend out the reserves?”
Guaranteed all 3 will say “yes!”....
Lock it....
From jpm earnings report this morning:
“Basel III common equity Tier 1 capital of $185 billion and ratio of 12.0%. Firm SLR of 6.5%”
Minimum Basel III is 3%... they are at TWELVE.... HELLLOOOOOO!!!!!
SLR is the current control ratio with trillions of reserves in the system.... and those non risk reserve asset levels are not under control of the banks.... they are under control of Central Bank morons who think the reserves are needed “to lend out!”...
They add the reserves and crash the risk asset prices as capital is fixed... they are all unqualified morons...
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