Powell Stays Silent on Extending Fed’s Bank Capital Relief

Federal Reserve Chairman Jerome Powell maintained his silence at a press briefing Wednesday over whether the regulator will agree to Wall Street banks’ request to extend a capital break that helped calm the Treasury market a year ago but is set to expire this month.

Powell declined to answer a reporter’s questions about moving the March 31 end date for the relaxed leverage limits -- a situation that’s added to anxiety among Treasury market participants hoping big banks won’t have to adjust their holdings. Since the start of Covid-19’s economic turmoil, lenders have been allowed to beef up their portfolios of Treasuries and reserves without having to maintain additional capital for the holdings.

“We’ll have something to announce on that in coming days,” Powell said at Wednesday’s press conference, declining to elaborate further.

Powell Stays Silent on Extending Fed’s Bank Capital Relief

Wall Street has lobbied hard to get an extension, saying the federal government’s ongoing stimulus efforts are still driving the need for banks to absorb their customers’ low-risk assets. Clients have run to banks with extra deposits, and the lobbyists argue the industry shouldn’t be punished for offering a safe harbor.

Treasury strategists also have said some of the recent volatility in the $21 trillion U.S. market could be tied to uncertainty over the Fed’s plan, with many expecting the market to react if the central bank declines to extend the relief. And some are interpreting the Fed’s adjustment of the daily counterparty limit in its overnight reverse repo facility as a signal it’s leaning against an extension.

That measure -- more than doubling to $80 billion a day the amount that individual counterparties can transact through the facility -- would potentially provide some relief to banks and the market if the looser capital requirements expire. That suggests that officials “know they aren’t extending,” NatWest Markets strategist Blake Gwinn said.

Lifting the cap, which was previously $30 billion per day, “could allow banks to push away deposits into money market funds” that engage in repos, draining reserves from the banking system, said Mark Cabana, head of U.S. interest rate strategy at Bank of America Corp.

Credit Suisse Group AG’s Zoltan Pozsar said the Fed was “foaming the runway” for the end of an exemption to the supplementary leverage ratio.

The increase of daily limit from $30 billion to $80 billion is the “right move” to deal with the “tsunami” of reserves being unleashed by the disbursement of U.S. stimulus, he said in a note. Adjustment is not quite the same as uncapping the facility, but very close, according to Pozsar.

“The adjustment will ensure that U.S. money market rates won’t trade negative and that money funds don’t face a collateral shortage that would force them to gate inflows and deflect institutional flows to the bill market,” he said.

Powell also was asked about another pandemic action affecting banks: limiting their capital distributions through shareholder dividends -- in some cases until at least the end of this month. Powell said the Fed hasn’t made a decision yet on what to do and that any announcement is “a couple of weeks away.”

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