The $6tn bank tweak that risks triggering the next crisis

Telegraph

2 days ago

Bair's big fear is that the money won't end up being funnelled back into boring bonds at all, but end up lining shareholders' pockets or in more exotic investments.
She says: 'Banks will likely find a way to distribute some of it to shareholders, or otherwise deploy it into their market operations which are riskier and more vulnerable to crisis conditions than insured banks.'
Covid buffer
Those who back removing Treasuries from the calculations highlight that it was done during the pandemic without much fanfare as banks ploughed more money into bonds.
However, analysts at Morgan Stanley have highlighted that this was in part a function of a 21pc jump in bank deposits as workers had nowhere to spend their cash during lockdowns.
It recently noted: 'The Covid-related surge in deposits means that 2020-21 is not comparable with today's environment, as deposit growth is tepid at 1pc year-on-year. Deposit growth, combined with loan demand, are key drivers of bank demand for securities as banks will prefer to use deposits to support client lending activity and build client relationships.'
Bair says capital buffers were put there for a reason. 'If there should be a future crisis, regulators have the authority to provide emergency temporary relief.
'Reduce capital requirements now, they don't know how banks may deploy it. Better to maintain strong requirements in good times so capital cushions will be there when bad times hit.'
Regulators are also keeping a close eye on this side of the Atlantic amid concerns we are moving towards a world where sovereign risk is completely removed from the leverage ratio. While the UK has already taken steps to remove central bank reserves from its calculations, officials here believe removing government bonds would be a step too far.
Rogoff, now a Harvard professor, agrees that capital buffers have served their purpose during times of crisis.
'It is notable how well the banking system held up during the pandemic, and later from the sharp rise in global interest rates. It is precisely when the system hits peak stress moments – especially when the economy is hit by completely out of the box shocks – that the SLR suddenly does not seem quite so crazy,' he says.
The rules tweaks may look benign, but bond sell-offs are often quick and violent. And it's usually the taxpayer left picking up the pieces.