Too Much Cash Sloshing Around > Fed Takes on Bloated Bank Reserves

With the Fed declaring banks to be well capitalized, there’s a chance it will no longer be able to justify its pandemic-spurred constraints on dividends. While the regulator already relaxed an earlier ban on stock buybacks, it’s still restricting shareholder payouts.

Fed Chairman Jerome Powell said this week that a decision is coming soon on dividends. . .

Fed to End Covid-19 Capital Break It Gave Wall Street Banks

By Jesse Hamilton    

‎March‎ ‎19‎, ‎2021‎ ‎6‎:‎00 Updated on ‎March‎ ‎19‎, ‎2021‎ ‎11‎:‎30             

• Relief from supplementary leverage ratio expires March 31
• Central bank says it’s weighing permanent changes to SLR

The Fed did provide another recent consolation, though, by more than doubling to $80 billion the maximum overnight reverse repo activity a participant can execute through the central bank’s facility. That could absorb some of the pressure of too much government stimulus cash sloshing through the system by giving money market funds a place to put it.

Bloated Coffers

U.S. bank reserves at the Federal Reserve ballooned last year amid SLR relief

Source: Wrightson ICAP, Federal Reserve

As Credit Suisse Group AG’s Zoltan Pozsar put it this week, the Fed is “foaming the runway” to deal with the stress of going back to the existing leverage rule by giving banks an additional ability to direct deposits into money market funds. Fed officials said Friday that move was a monetary-policy decision and not directly related to the leverage limit.

For the past year, that relaxed leverage cap had allowed the lenders to take on as much as $600 billion in extra reserves and Treasuries without bumping up their capital demand. The banks could now be under pressure to shed some of those assets or seek more capital.

JPMorgan has said it might consider turning away certain deposits as a result. And some Treasury market strategists expect a hit to the market as the biggest lenders potentially sell holdings.

The Fed faced intense political pressure from Democratic lawmakers, including Senate Banking Committee Chairman Sherrod Brown and Senator Elizabeth Warren, to let the capital break lapse March 31. While Democrats lauded Friday’s announcement, they will likely scrutinize the agency about its decision to propose permanent changes to the SLR. In a Feb. 26 letter to the Fed, Brown and Warren called it “one of the most important post-crisis regulatory reforms."

The leverage ratio, adopted as a key safety measure after the 2008 financial meltdown, has always been a three-agency effort. Though the Fed and OCC had proposed a wide-ranging overhaul in 2018, that project stalled. Fed officials said Friday they’ll work with the OCC and FDIC to determine what’s next. However, the Fed has been known to sometimes move independently on capital rules.

— With assistance by Michael McKee, Alex Harris, Liz McCormick, and David Scheer

(Updates with lawmakers’ responses from 19th paragraph, as well as chart.)