Important Federal Reserve Announcement by Investing.com

Investing.com – Urgent: The Federal Reserve has refused to extend the facilities it introduced to the amount of capital allowed for banks relative to bonds and other assets, in a move that could upend the bond market, Wall Street.

The size of the compulsory capital of banks is one of the decisions taken by the central bank after the global financial crisis, and it would reduce the exposure of investment banks to risky assets without any consideration.

During the pandemic, the federation allowed some accommodations regarding these rules.

In a brief Federal Reserve announcement, the Fed said it would allow the leverage ratio to expire on March 31. The Fed began this type of easing in April 2020, with the aim of allowing banks to exclude Treasury bills and Fed bank deposits from leveraged rate accounts *.

Financial leverage: borrowing or using financial instruments that results in an amplification of the impact of profits or losses on the investor, and is often used to describe the ratio of debt to equity in companies . The higher the debt ratio, the greater the leverage effect on earnings.

The aim of the decision was to reduce capital requirements, which was a key tool in appeasing the bond market during the early days of the pandemic. The need for liquidity caused a massive liquidation of treasury bills, and the Fed helped cover the loss with liquidity programs.

The Federal Reserve has said it will issue a public comment on how to change the SLR * in the future, but that for now it will allow the waiver to expire.

SLR is: the percentage of deposits that commercial banks hold, and they are required to keep them in the form of cash, gold or some other security.

“The committee will take appropriate steps to ensure that any change in the SLR will not erode the overall strength of banks’ capital requirements.”

Wall Street tried to pressure the central bank by all means to maintain this form of easing to exempt the banks into which deposits were pouring.

With the Fed’s decision to stop SLR exemptions, the Fed risks raising interest rates as it forces banks to sell certain holdings.

With the Fed’s decision to stop SLR exemptions, the Fed risks raising interest rates as it forces banks to sell certain Treasury securities to meet capital requirements.

Note that the sale of Treasury bills implies a sharp rise in Treasury yields. With the rise in Treasury bill yields, the risks will increase with a rise in the price and the liquidation of certain commodities such as gold and oil, which is now affected by a number of factors not favorable to the rise, starting with the Corona Crisis in Europe, through the rise in the dollar index, and ending with concerns about the increase in production outside OPEC.