Fed “Temporarily” Blesses More Leverage: What’s Really Going On?

Another Bazooka to Nowhere

In yet another act of Fed desperation, Big Banks Get Blessing to Extend Leverage.

To ease strains in the Treasury market resulting from the coronavirus and increase banking organizations’ ability to provide credit to households and businesses, the Federal Reserve Board on Wednesday announced a temporary change to its supplementary leverage ratio rule. The change would exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of the rule for holding companies, and will be in effect until March 31, 2021.

Liquidity conditions in Treasury markets have deteriorated rapidly, and financial institutions are receiving significant inflows of customer deposits along with increased reserve levels. The regulatory restrictions that accompany this balance sheet growth may constrain the firms’ ability to continue to serve as financial intermediaries and to provide credit to households and businesses. The change to the supplementary leverage ratio will mitigate the effects of those restrictions and better enable firms to support the economy.

As the Board has previously stated, financial institutions have more than doubled their capital and liquidity levels over the past decade and are encouraged to use that strength to support households and businesses. The Board is providing the temporary exclusion in the interim final rule to allow banking organizations to expand their balance sheets as appropriate to continue to serve as financial intermediaries, rather than to allow banking organizations to increase capital distributions, and will administer the interim final rule accordingly.

The supplementary leverage ratio generally applies to financial institutions with more than $250 billion in total consolidated assets. It requires them to hold a minimum ratio of 3 percent, measured against their total leverage exposure, with more stringent requirements for the largest and most systemic financial institutions. The change would temporarily decrease tier 1 capital requirements of holding companies by approximately 2 percent in aggregate.

The change will be effective immediately and the public comment period will be 45 days.

Effective Immediate With 45-Day Comment Period

Why bother with comments?

Oh wait, I get it.

Banks will ask to make this permanent . They will also seek even greater leverage.

The Problems are Debt and Leverage

Excuse me for pointing out that the problems are debt and leverage.

So, how does encouraging banks to take on more debt with more leverage help?

Temporary?

And what about this “temporary” thing?

Will banks reduce capital ratios now if they believe they will have to go out and raise capital later?

Explaining the 3% Capital Requirement

If banks increase leverage then suffer a 3% loss, they will be wiped out.

Will they?

My best guess is banks have already taken huge capital losses but are hiding them under mark-to-fantasy options.

Recall that regulators suspended mark-to-market rules in March of 2009 and never restored them.

Estimating Bank Losses

The Fed increased the amount of leverage banks can have because banks have likely already taken a 1-2 percentage point hit to capital, if not far more.

If so, the Fed is not really encouraging more leverage. Rather the Fed just blessed the increased leverage that has already taken place.

Why?

So that banks will not be forced to raise more capital at this time.

What Can Possibly Go Wrong?

For starters, the Covid-19 Recession Will Be Deeper Than the Great Financial Crisis.

Also, please see Nothing is Working Now: What’s Next for America?

Mike “Mish” Shedlock

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Mish
Mish
4 years ago

Reader Q: “is this just allowing the banks to make more loans, or does this allow the banks to actually buy more assets like Treasuries for their own account?”

Banks make loans under three conditions. All must be true.

  1. They are not capital impaired
  2. They believe they will profit
  3. A creditworthy customer wants to borrow

The Fed can encourage but it cannot change the conditions

Brexitologist
Brexitologist
4 years ago

We´re gonna need a bigger chart…

bilejones
bilejones
4 years ago

This is the core reason behind the panic.
Every sane person has known that the collapse of the Great Pyramid of Bubbles (Some obscure Egyptian king I think) was going to result in a Greater Depression.

The Flu is the, not perfect but pretty bloody good, excuse. To quote the warmonger Rumsfeld : wrap it all up, related or not.

aqualech
aqualech
4 years ago

Mish: is this just allowing the banks to make more loans, or does this allow the banks to actually buy more assets like Treasuries for their own account?

Casual_Observer
Casual_Observer
4 years ago

Can we just admit that we have a nationalized banking system ? Same as many other countries do now. The idea that a bank isn’t backed by the government is kind of a running joke.

RonJ
RonJ
4 years ago

“With reserve requirements down to zero…”

Fog a mirror

KidHorn
KidHorn
4 years ago

The banks are going to be fine. Every dollar in the bailout will go through the big banks and they’ll take their cut. They’ll buy the trillions in new treasuries and flip them to the FED for a profit. I suspect JPM, BAC, Citi, etc.. will make at least $10b each off the new Quantitative easing. The FED will make sure of it. And the value of their current treasury holdings is going to go up in value.

CzarChasm-Reigns
CzarChasm-Reigns
4 years ago

“Recall that regulators suspended mark-to-market rules in March of 2009 and never restored them.” —Mish

Tells you all you really need to know.

Greggg
Greggg
4 years ago

aqualech
aqualech
4 years ago
Reply to  Greggg

Thanks for sharing. The take-away? Our financial system is now like “The Matrix”. A false universe where all interest rates are completely artificial and by extension all asset prices that move on the basis of borrowing and speculation. The bad part is that so many of us have plowed almost everything (look at what annuities, insurance companies, pension funds etc. own) into credit markets which could more-or-less go tits-up should there ever be honest price discovery for bonds and treasuries and what not.

AbeFroman
AbeFroman
4 years ago

“ So, how does encouraging banks to take on more debt with more leverage help?”

I guess the same way the thinking went 11 years ago. Can you believe we’re doing this again so soon? Wow.

Ted R
Ted R
4 years ago

Vault cash is gone. That is the problem at the banks right now.

Bam_Man
Bam_Man
4 years ago

You really do have to hand it to these dirty, evil bastards.
As US reserve currency status evaporates before our very eyes, they manage to keep the (paper) price of Gold ridiculously low.

Freebees2me
Freebees2me
4 years ago
Reply to  Bam_Man

WRONG! the US Dollar will remain the “Reserve Currency” for the foreseeable future.

Does anyone really think the Chinese Yuan is a better alternative?

Trust and value are still key…..

Zardoz
Zardoz
4 years ago
Reply to  Freebees2me

Value is predicated on trust… and we have elected an inept con man to lead the country. I live here, and I don’t even trust the dollar.

Freebees2me
Freebees2me
4 years ago
Reply to  Zardoz

So why did the Governor of California say that Trump has been there for them? I guess he was lying….

The ‘con’ is China….

P.S. – how old are you? You understand what you’re talking about?

Anda
Anda
4 years ago
Reply to  Freebees2me

Not sure.

The US is largely a service economy that trades out its international position, so when international trade gets interrupted the US cannot claim that position ?

International reserves are held to access the US trade platform, if it is not working they might get dumped for something more tangible.

RedQueenRace
RedQueenRace
4 years ago
Reply to  Bam_Man

They aren’t suppressing anything. Do the math on the RMB price fixes for the Shanghai Gold Exchanges auctions. The SGE is the largest physical market in the world. These are physical gold transactions, not paper.

The fixes were $1559.68 / (troy) ounce and $1569.19 / ounce based on an RMB / $ conversion ratio of 0.140904 I used first thing this morning. So the fixes aren’t an exact conversion as the rate at the time of the fix would most likely be different but they will be off by less than $1 as outside of revaluations it moves very little.

The April GC contract LOW for all of yesterday was $1581.10. As I write this the bid/ask is above $1624 on both sides.

Paper is trading above what bullion in the non-retail dealer market is selling for.

Freebees2me
Freebees2me
4 years ago

Dear ALL,

If there was ever a picture of desperation, this is it! Having said that, the “Minsky Moment” is a LONG WAY OFF.

Life is a path of choices. The ‘Minsky Moment’ will arrive ONLY when the ‘greater fools than I’ realize that there is a viable alternative.

A viable alternative to the dollar requires many attributes, but one that is particularly important – it is safe and reliability. Meaning one can sleep at night without concern that what one thought they had, they actually still have.

Getting ready for debasing the dollar but the effects will take a LONG TIME.

Bam_Man
Bam_Man
4 years ago

I will not be making my credit card payment next month. Go leverage that.

Tony Bennett
Tony Bennett
4 years ago

“The Fed increased the amount of leverage banks can have because banks have likely already taken a 1-2 percentage point hit to capital, if not far more.”

I found quite interesting JPM most recent balance sheet revealed Treasury holdings grew around $60 billion to $70 billion … while loan growth stagnated. A “tell” that JPM sensed the jig about up on expansion … even without intrusion of virus.

JG1170
JG1170
4 years ago
Reply to  Tony Bennett

*…and thus decided to flip the switch on the virus.

lol
lol
4 years ago

Fed preppin for TARP2.0 or the nationalization of banks,tens of trillions will be written off,credit card….$1trillion,autos $1 trillion,mortgages $1 trillion,REO’s /CRE’s…3-4$trillion,student loans….$2trillion,shale 2trillion and change,s,SBA’s…3tril (at least)…etc…etc..etc..and this after a decade of “recovery (lol)and a “booming”(LMMFAO)economy!

Tony Bennett
Tony Bennett
4 years ago

“Why?

So that banks will not be forced to raise more capital at this time.”

Yes … and kick the can a bit before TARP.2 comes in to play. Note that notice is for banks with $250 billion+ assets … ie: probably threshold for TBTF. Following last recession (and TARP) I read multiple articles from respected sources that Congressional members adamant (behind closed doors) to Treasury and Federal Reserve to do WHATEVER it took for them to ever have bail out big Wall Street banks. Again. Voters / taxpayers nearly revolted (I personally called / wrote probably a dozen lawmakers against TARP).

offbyone
offbyone
4 years ago

Fed needs to bribe those banks to help their fund raising efforts

Greenmountain
Greenmountain
4 years ago

And where was our wonderful federal government? Checking ratings on the daily press conference or managing WH infighting.

Brexitologist
Brexitologist
4 years ago

Say no more…

tokidoki
tokidoki
4 years ago

When all you have is a hammer, everything looks like a nail.

No ventilators? Cut rates and raise leverage.
No masks? Cut rates and raise leverage
Shortage of hospital beds? See the above.

Actually speaking of masks. Forbes has the following (TLDR, we’ve been exporting masks):

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