Fed Hands Banks $6 Trillion Hall Pass, Wall Street Already Ordering Bottle Service…

Forget lowering interest rates…. The Federal Reserve thought it was more important to once again hand America’s biggest banks a get-out-of-jail-free card. How? By easing up “leverage” restrictions. To which I say, is about as logical as handing a 14 year old kid a Playboy mag and telling him not to get any ideas. 

(Source: Giphy) 

In short, yesterday, the Fed unveiled a proposal to loosen the so-called “enhanced supplementary leverage ratio” (eSLR) for the big dogs… think JPMorgan, Goldman Sachs, Morgan Stanley, Bank of America, and Citigroup. The S&P 500 Banks Index jumped 1.4% presumably because this is the best news they’ve had since they realized nobody actually reads the fine print on their overdraft fees. 

(Source: Reuters) 

But alas, under the new plan, banks basically get to hold less capital against “safe” assets so Treasurys and cash go from being treated like radioactive waste to more of a participation trophy. Morgan Stanley’s analysts are already out here estimating the move could free up $185 billion in capital and up to $6 trillion in balance sheet capacity. Credit default swaps, anyone? The Fed’s logic with this is that the old rules penalized banks for holding Treasurys, treating them the same as sketchy subprime loans or, God forbid, WeWork bonds. As bank reserves ballooned and government debt went full Zyn, the leverage ratio became less about safety and more about tying banks’ hands behind their backs. Which to be fair, is kind of safe… imo. 

(Source: CNBC) 

However, now, with Vice Chair for Supervision Michelle Bowman steering the ship, the Fed wants banks to be able to hoard Treasurys without feeling like they’re one step away from detention. The new ratio drops capital requirements from a chunky 5% to a range of 3.5%-4.5% for holding companies, and 6% to the same range for subsidiaries. If you’re keeping score at home, that’s billions in capital suddenly freed up for “other uses.” (Translation: buybacks, dividends, and, if you’re feeling “humane” probably another coup that involves a vast amount of AK-47s in Sudan LOL). 

With that said, not everyone is horned up over this. Fed Governors Kugler and Barr seem to be the only adults in the room, warning that this is basically doing exactly what I mentioned at the beginning of this article. More specifically, Barr says banks will just shovel the freed-up cash to shareholders and chase riskier returns, not actually help the Treasury market. 

(Source: Giphy) 

On the other hand, Wall Street is already dreaming up ways to arbitrage this. With $6 trillion in new “capacity,” expect the big banks to channel their inner Lawrence Boyd to rig the treasury market make it rain liquidity and maybe, just maybe, lower costs for everyone else. Or, you know, just making themselves richer. Bet.

Regardless though, it’s crystal clear that the Fed’s trying to juice Treasury market liquidity and keep the system from seizing up every time Washington has a meltdown. But if you think the banks are going to use this windfall for the greater good instead of another round of buybacks and “record bonus” press releases, you probably think Trump calling Powell “stupid” is a compliment. 

(Source: Giphy) 

For now though, investors are hyped, regulators are salty, and somewhere Jamie Dimon is doing Jamie Dimon things… a.k.a. Living a better life than all of us. So with that, keep your head on the swivel for any bank shenanigans and place your bets accordingly. Until next time, friends… 

At the time of publishing, Stocks.News does not hold positions in companies mentioned in the article.