Federal Reserve: A Nod Of Confidence
The Federal Reserve's decision to remove a Covid-crisis-induced emergency measure for banks has important ramifications. It shows that the Fed is confident on US banks, and the system. It also suggests comfort on the rise in market rates to date. It in fact could be construed as a moderate tightening in policy. Here, we explore SLR reversion implications.
The Fed makes a bold statement by removing a key emergency measure employed to support the banks and the system
A year ago the Federal Reserve gave US banks a break by allowing them to exclude holdings of Treasuries and excess deposits from the supplementary reserve ratio (SLR), a ratio that places a limit on bank balance sheet extensions (relative to capital). That was good through to 31 March 2021. Logically, the thought process was that the Fed would extend this. This was based on the clear preference of the Fed to date to keep emergency policies in place, as a precautionary measure. In the event the Fed has decided to let the SLR break roll off, so that from 1 April onwards we revert to the pre-crisis state.
Ahead of this, there were soundings from across Wall Street alluding to concern that the Fed was considering an adjustment to the SLR break. There were warnings in some quarters that if the Fed did so that US banks would have to stop taking deposits. While this is indeed technically a possible outcome, it is unlikely to be an actual outcome. Some anticipation of the Fed’s decision can also be gleaned from the selling of Treasuries from banks seen in recent weeks. In that sense the outcome was not a complete surprise. We had thought that the Fed would extend, but we were also quite clear that this was far from a conviction view, because of the many nuances surrounding the measure.
This is quite an important move from the Fed on a couple of counts. First, it must go down as the first easing of exceptional policy undertaken by the Fed off their own bat. We know that they wound down various emergency facilities at end 2020, but this was as a result of the US Treasury taking capital underpinnings away from them. In fact the Fed objected to this, even though many of the facilities were in decline anyway, as things were very much on the mend. Second, it is a signal that the Fed is quite comfortable with the workings of the system, and the banks. In fact, the 3mth Libor rate as a catch-all measure of banking stress tells the same story, as it remains comfortably in sub-20bp territory (below the Fed’s 25bp fund rate ceiling).
Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...
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Bert Colijn is a Senior Eurozone Economist at ING. He joined the firm in July 2015 and covers the global economy with a specific focus on the Eurozone. Prior to this, he worked at The Conference Board, a global think-tank, in Brussels focusing mostly on long-term economic growth. He holds an undergraduate and graduate degree in International Economics and Business from the University of Groningen.
Carlo is an Economist at ING and has been with the firm since January 2016. He is mainly interested in the future of banking, blockchain and virtual currencies. He began his career at Barings Asset Management and holds an MSc in Economics. 
Inga Fechner is an economist at ING in Germany, covering international economic developments with a specific focus on Austria. She joined the company in 2014 after graduating in Economics from the University of Münster, with studies abroad in Japan and Italy.
Marieke Blom is the Chief Economist at ING in the Netherlands.
Maurice van Sante is a Senior Economist covering the construction and real estate sectors. He joined ING in 1998 and till 2006 he was a treasury advisor and cash manager consultant. Maurice studied Economics at the Erasmus University in Rotterdam.
Peter Vanden Houte is Chief Economist Belgium, Eurozone and has been working with ING in various research functions for the last 20 years. He is also chairman of the “economic commission” at the Belgian Employers Federation.
Robert Carnell is Chief Economist and Head of Research, Asia-Pacific, based in Singapore. For the previous 13 years, he was Chief International Economist in London and has also worked for Commonwealth Bank of Australia, Schroder Investment Management, and the UK Government Economic Service in a career spanning 24 years. Robert has a Masters degree in Economics from McMaster University, Canada, and a first-class honours degree from Salford University.
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