Powell Says Fed Wants to Amp Repo Liquidity Without Rewriting Rules

(Bloomberg) --

Federal Reserve Chairman Jerome Powell said the central bank has been looking at long-term options to improve market liquidity, including “intraday” measures, after short-term markets suffered an alarming funding squeeze last month.

The Fed is considering technical adjustments to head off a repeat of the September crunch, Powell said at a news conference Wednesday. He said he doesn’t think the agency will consider changes to Wall Street’s capital or liquidity rules.

“It used to be a common thing for banks to have intraday liquidity from the Fed, what we called daylight overdrafts,” Powell said. “That’s something we can look at, and there are some technical things we can look at that would perhaps make the liquidity that we have -- which we think is ample -- in the financial system move more freely.”

The Fed in recent decades has placed increasing limits on the ability of banks to overdraw their accounts, as might happen in the course of large transactions throughout the day. The 2008 financial crisis demonstrated the dangers of running big shortfalls, and regulators have sought since then to reduce reliance on short-term funding.

Powell said the Fed was surprised by the behavior of the megabanks last month. The agency had surveyed banks to find out the liquidity minimums they were comfortable with, but Powell said they stayed far above those thresholds instead of putting that liquidity to a more lucrative use.

“They didn’t deploy that liquidity when there seemed to be great opportunities to do that,” he said. “So why is that? We’re doing careful analysis.”

Treasury Secretary Steven Mnuchin said this week that he’s open to loosening post-crisis regulations that have stiffened liquidity requirements for big banks. While regulators have made some moves to relax the rules this year, the changes haven’t done much for Wall Street.

To contact the reporters on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net;Emily Barrett in New York at ebarrett25@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

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