by David Henry and Michelle Price
WASHINGTON, March 19 (Reuters) – Major U.S. banks will have to replenish capital reserves to cover possible losses on their treasury bill holdings and central bank deposits after the Federal Reserve’s decision not to extend exemption from this rule decided at the start of the coronavirus crisis.
Last April, the Fed had in fact temporarily excluded US Treasury bills and central bank deposits from the calculation of the “supplementary leverage ratio” (SLR) with the dual objective of reducing tensions on the market. bond linked to the pandemic and promote credit.
This exemption, which expires on March 31, will not be extended, she announced on Friday, which means that banks will again have to hold a capital “cushion” supposed to allow them to absorb possible losses. on these assets.
However, the Fed added that it would reassess the calibration of the SLR ratio “to prevent the formation of tensions which could both weigh on economic growth and harm financial stability”. The institution considers that the exceptional monetary measures implemented over the past year have affected the functioning of the SLR.
On Wall Street, the shares of the country’s main banks fell at the start of the session in reaction to this announcement: JP Morgan Chase yielded 3.32%, Bank of America 2.59%, Citigroup 1.53%.
Questions about the fate of the SLR exemption have contributed in recent weeks to tensions in the bond market in the United States. According to analysts, the lifting announced Friday could lead banks to reduce their holdings of government bonds and reduce the funding provided to other investors so that they themselves buy bonds.
The Fed nevertheless displayed its confidence on Friday that the lifting of this exemption will not disrupt liquidity in the government bond market, estimating that the market had stabilized and that the major US banks had the levels of high equity.
The ten-year Treasuries yield rose after the central bank’s announcement and stood at 1.728% around 2:20 p.m. GMT, compared to less than 1.69% before the Fed’s statement.
The SLR ratio was created after the financial crisis of 2007-2009 to complete the arsenal of prudential measures supposed to prevent the bankruptcy of large banking establishments.
But its importance has increased recently, the share in the balance sheets of banks of capital resulting from plans to support the economy having increased sharply.
Bank deposits at the Fed have in fact more than doubled since the start of the coronavirus crisis to reach $ 3,900 billion according to figures released Thursday by the central bank. And they could increase by another 2,000 billion before the institution begins to reduce its support.
(French version Marc Angrand)
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