BY ANNA SZYMANSKI

It’s tough to pity the likes of JPMorgan, Bank of America and Goldman Sachs. But Wall Street giants with more than $700 billion in assets have barely benefited from the regulatory rollbacks bestowed on smaller peers and other industries by President Donald Trump’s administration and the Federal Reserve. But the central bank will finally give them some satisfaction in the next few months.

Sadly for the them, they won’t suddenly be allowed to cut their overall capital levels. Instead, they’ll get some relief from tweaks to the short-term lending market known as repo.

This usually arcane part of the business hit the headlines in September when repo rates jumped more than fourfold to around 10%. It wasn’t even sparked by an actual crisis. Large banks exacerbated the spike, though, by not exchanging reserves – basically a form of cash – for treasuries. Postcrisis rules were a big part of the reason why.

Technically, treasuries are treated the same as cash for many capital requirements for lenders, like the liquidity coverage ratio. But Fed Vice Chair Randy Quarles has said that many banks feel regulatory pressure to favor reserves. Ultimately, the two aren’t interchangeable: A client wanting to borrow $1 billion when the repo market is closed isn’t going to accept U.S. government bonds.

The Fed is likely to alleviate this by creating a permanent standing facility, presumably run by Lorie Logan, head of the New York Fed’s market operations. Banks could get cash from the Fed in exchange for high-quality assets like treasuries almost any time on a business day. That ought to persuade their repo desks to hold more treasuries, rather than hoarding reserves, and thus make a bit more money. It could also allow banks to reduce the amount of reserves they hold to satisfy their so-called living-will liquidation plans; the eight largest players currently have nearly $800 billion set aside as a precaution and could cut that drastically, the New York Fed reckons.

The facility would need some deft handling, from determining both the firms and assets allowed, to setting the right borrowing rate: too high, and it creates a stigma; too low and the Fed ends up running the entire market.

Those ought to be manageable. Granted, it wouldn’t be quite the regulatory relief the banks have been hoping for. But it would be welcome nonetheless.

First published Dec. 9, 2019

IMAGE: REUTERS/Carlo Allegri