The Federal Reserve is temporarily relaxing a rule that imposes additional capital requirements on deposits and treasury securities held by the largest US banks.
“Liquidity conditions in the Treasury markets have deteriorated rapidly, and financial institutions are receiving large inflows of customer deposits as well as increased reserve levels,” said the Fed in its announcement. “The regulatory restrictions that accompany this growth in the balance sheet may limit the ability of businesses to continue to serve as financial intermediaries and provide credit to households and businesses. The change in the additional leverage ratio will lessen the effects of these restrictions and allow businesses to better support the economy. “
The move marks a complete turnaround in money market conditions from early March, when interest rate shifts indicated that banks’ cash reserves were insufficient. The Fed responded to this shortage on March 15 by announcing unlimited purchases of Treasuries and mortgage-backed securities.
This Fed buys the balance sheets of banks flooded with reserves. In addition to this, major banks have also received “large inflows of customer deposits,” according to the Fed, as investors and businesses source cash to prepare for the halt to supposed economic activity. contain the spread of the new coronavirus in the United States.
In other words, banks now appear to have excess reserves, at least based on their activity in the money markets, according to George Pearkes of Bespoke Research Group. While at the beginning of the month, they were promising Treasury bills to borrow short-term cash, after the Fed’s stimulus efforts, they began to promise cash to borrow short-term cash.
“The availability of liquidity has gone from inadequate (not enough reserves) to excessive (pension rates likely to turn negative) in less than two weeks,” Pearkes wrote in a note.
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