US banks currently hold almost $4 trillion in Fed deposits, as a result of the ongoing balance sheet expansion by the Federal Reserve. Meanwhile, a year-long exclusion of Fed deposits and US Treasuries from bank capital rules is set to expire on 31 March. This column proposes a simple, feasible, and mandate-consistent strategy to replace $3 trillion in deposits with Treasury bills. These Treasuries could be held not only by banks, but also by mutual funds and non-residents, and this substitution also could save taxpayers money....Vox.eu
Unstuffing banks with Fed deposits: Why and how
Robert McCauley, Corte Real Advisors; Boston University, University of Oxford
“ None of the eight broker-dealers will be forced to sell Treasuries (Pozsar 2021), but the changes are chunky. JP Morgan Securities, which stocked up on Treasuries in 2020, may already be shedding them given its prospectively higher SLR. ”
ReplyDeleteSell them for WHAT? They get Reserves in exchange..,
It would be funny as hell if they let this exemption expire Weds then the whole thing crashes again... as usual...
“but it actually bought Treasury and agency bonds at a furious rate (Caballero and Simsek 2020, McCauley 2020). Banks’ deposits at the Fed propagated virally, rising from $1.68 trillion on 26 February to reach $2.68 trillion on 1 April 2020.”
ReplyDeleteLOL that’s what caused the crash it always does.... what did that additional $1T of reserve assets do to the SLR?
Fed stress tests now require banks to be able to withstand a 55% reduction in equity prices...
ReplyDeleteThey are probably planning on another 50% crash....
Here:
https://twitter.com/newsfilterio/status/1376618626032279553?s=21
“ ViacomCBS's Slide Hits 55% Over 5 Days as Giant Rally Reverses”
It went down 55% because that is where Fed has the stress test levels currently set for equity declines...
Banks didn’t lose a dime... they are protected from a 55% equity decline.... Viacom shareholders down 55% though...
Banks and Fed don’t care if equities go down 55% due to SLR and Reserve policy .... the FRS system of CB and Depositories will survive ...
“ Treasury could “overfund17 and repurchase” its bonds held by the Fed (McCauley 2003, 2006, 2008, McCauley and Ueda 2009, Greenwood et al. 2014, Ma and McCauley 2015). The Treasury could announce that over time it would auction, $3 trillion more in its bills than its deficit requires.”
ReplyDeleteYo that’s what they did last year they ran the TGA up by 1.5T by issuing 1.5T zmore Bills than they needed.... now they are reducing tga and reserves are increasing again....
This policy has ZEEEEEEEERRRRRROOOOOO chance of passing under Democrats....
Best thing that could happen is they create another crash after April 1 on massive reserve add again as usual and THEN maybe they’ll do something constructive..,
Fed (via “stress tests”) is telling banks to prepare for 55% equity price reduction because they and Treasury TGA policy are going to be pouring on the Reserves without end and SLR is coming back...
ReplyDeleteMaybe this Archegos forced liquidation last week was a small test of their controls....
"Sell them for WHAT? They get Reserves in exchange.
ReplyDeleteExactly. You cannot deleverage by selling Treasuries.
Banks must raise capital if they not in compliance or stop share buybacks.
They can also force liquidation... go “liquidation only”... or go “45% bid” as they are protected down 55% due to “stress tests” requirements...
ReplyDeleteHere is the new Fed guy:
https://twitter.com/wsjecon/status/1376596278147231746?s=21
“ “Deficit financing and debt servicing issues play no role in our policy decisions and never will,” Fed governor Christopher Waller said in his first public speech.”
That’s a big FU to Trump... they are not public servants... they are Monetarist true believers... they will do asset purchases to provide reserves “to lend out!” and keep rates at zero until they see “inflation!” which they cannot define...
That’s their story and they’re sticking to it... (all Art degree people there)...
EVERYTHING ELSE (including equity prices) is not a priority... as long as the preservation of their system is protected...
“ Banks must raise capital if they not in compliance or stop share buybacks.”
ReplyDeleteThey won’t do either willingly...
They can crash the stock market again, blame sleepy Joe and Pocahontas, and politically force congress to provide permanent leverage relief...
Crash the stock market how? I worked at a bank. I had virtually an unlimited futures account that I traded. I put on a thousand lot position in the S&P futures once trying to drive the S&P down and it failed. How do they crash the market?
ReplyDeleteIf they force liquidate everyone they book losses, too. They force liquidated a guy who was in over his head. Things like that happen from time to time with little consequence to the market other than a day or two. I was in the trading pits in the 1987 crash--Dow down 22% in one day. That would be like a 6600 point decline today. Nobody even remembers that anymore.
ReplyDeleteAnd my thousand lot position was in 1991. That was a BIG position back then. And it barely budged the market.
ReplyDeleteAll these scary stories about the SLR have been total bullshit. Banks have been huge buyers of Treasuries. And in the lead up to those stimulus checks they were also increasing loans. The banks are fine.
ReplyDeleteYes the banks are fine... currently set up to survive 55% equity price decline... yes banks will be fine...
ReplyDeleteIf SLR is in force and then Fed adds enough reserves banks will first reduce the price of their other assets to maintain SLR compliance before considering capital raise or dividend cut or reducing buybacks... and can maintain compliance up to 55% reduction of equity prices that is current “stress test” requirement...
Or “It’s about price not quantity”...
And “all prices are necessarily a function of what govt pays for things and what govt let’s their banks lend against things”...
They just reduced the price of Viacom shares by 55%... I haven’t heard about any US banks taking a loss on that... they probably made money on that... . Fed currently has the banks hedging against 55% equity price reductions...
I guess doesn’t exactly mean a 55% equity decline is inevitable but Fed must think it’s possible due to what they have planned for monetary policy...
Meanwhile They have us in this shitty monetary drag environment at ZIRP and adding 120b of reserves every month (why?) and TGA still $1T over deficit (why?) and the largest part of the equity market nasdaq 100 shares are sitting here at 313.50 when they were at 303.50 already 7 months ago when TGA topped... up 10 bucks a share in 7 months big deal...
Fiscal policy is compensatory for the shutdowns and bullish yes but monetary policy is back to creating monetary drag...
Back to creating monetary drag?
ReplyDeleteIt's always been creating monetary drag. Asset purchases are monetary drag.
Too much focus on this. They can't do squat other than set a price level. They can't crash the market by buying assets or loading up the banks with reserves either. There is little, if any, correlation.
I’m thinking the post GFC Obama admin 8 years of sub 2% growth if they go “full Japan” with permanent ZIRP and just keep buying 120b/mo forever...
ReplyDeleteStocks can go up somewhat in that environment...
https://kfgo.com/2021/03/30/wells-fargo-says-no-losses-from-archegos-downfall/
ReplyDeleteUS banks protected for up to 55% equity price reductions... “stress tests”... yes they’ll be fine....
Am I missing something, or is this "solution" really an incoherent no-solution? If the banks buy the bonus t-bills, it would reduce their reserves but have no effect on the SLR because assets are unchanged. If money market funds buy the bonus t-bills, then bank assets are still unchanged and it has no effect on the SLR.
ReplyDeletePlus, if the Treasury reduces the then bloated TGA by buying bonds from the Fed, its essentially a wash. The fed's balance sheet is reduced by 3T, but that's not going to change the amount of reserves and it's not going to "save taxpayers money" because the interest on the bonds is returned to the Treasury anyway.
I could be missing something, but that's the accounting in my head.
As far as what happens next, it sounds like not much. Banks are still above the SLR anyway, so there's no need to stop buybacks, dividends or raise capital anyway, and shouldn't be a need to sell other assets. The only way this goes bad is if banks decide they want to make a mess because The Fed bowed to political pressure and made them do something they didn't like. Feel free to correct me if I'm wrong.
@ dave
ReplyDeleteI have only done the accounting in my head too, but that appears to be correct. There are only three ways to take reserves off the Fed's liabilities held as nongovernment assets in the payments system, which is where they reside — 1) taxation (Treasury), 2) securities issuance (Treasury), or 3) monetary operations that involve selling securities (cb).
The SLR looks to be a clumsy attempt to regulate banks indirectly when the government has the power to regulate banks directly as chartered institutions engaged in a public-private partnership, which is what the banking system is in the US and UK, at least as I understand it.
This is especially true since the monetary authorities don't seem to have good handle on how the system actually works. Janet Yellen admitted this when she said that the Fed doesn't have a good theory of inflation. Basically, if one is making decisions independently of rule, then the criteria are discretionary, which is basically "educated guessing."
The SLR is a clumsy attempt to set a rule, which actually didn't work at the margin in that the Fed had to abandon it for a time.
The Fed is charged with 1) running the payments system, which now largely automated, 2) monetary operations, which should be limited to setting the interest rate, and acting as chief regulator. Alan Greenspan abandoned this later function at the time of the property/mortgage bubble that resulted from the securitization debacle.
The Fed seems to have attempted to address the fallout through monetary means, whereas the need is for better supervision of the system.
I as far from an expert on this but that is the way it appears to me anyway. So dump the SLR and do what is intended to regulate the system directly.
I would be interested in hearing from those who know more about this than I do.
Here is where I am unclear on the accounting.
ReplyDeleteMarket Participants
The participants in the fed funds market include U.S. commercial banks, U.S. branches of foreign banks, savings and loan organizations and government-sponsored enterprises, such as the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Association (Freddie Mac), as well as securities firms and agencies of the federal government. — Investopedia
These are the institutions that have access to the Fed spreadsheet through access to the payments system. Reserve balances (rb) can be shifted from one entity to another but exchange of assets or lending within the system. Banks can offload rb by purchasing securities from the Fed, either at auction (only primary dealers) or through monetary operations, or else by entering into transactions that shirt rb on the Fed's spreadsheet. So while a bank can either transact with another bank to reduce rb or with another entity like a money market fund, the amount of rb in the system remains constant.
I have not seen anything on this. Even then Treasury secretary Larry Summers told Warren Mosler that he did not understand reserve accounting. Is there a reference that explains this in terms of all the entities involved. (Yeah, I searched on it and didn't find what I was looking for.)