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Speech by Vice Chair for Supervision Quarles on the economic outlook, monetary policy, and the demand for reserves
Following the implementation of these requirements, large banks have more than doubled their buffers of liquid assets. More specifically, our largest banks have significantly increased their holdings of assets known as Level 1 high-quality liquid assets (HQLA). Level 1 HQLA includes central bank reserves, Treasury securities, and Ginnie Mae securities.
As discussed in the original design for the LCR, all forms of Level 1 HQLA are treated as substitutes. There is no preference for reserves versus, say, Treasury securities in the calculation of the ratio.
Despite the regulatory text's equal treatment of Level 1 HQLA, we know that reserves have special characteristics when it comes to stress. Even though the Treasury market is the most liquid in the world, in an actual stress event, banks would still need to take steps to monetize Treasury securities to meet cash outflows.
However, it may be difficult to liquidate a large stock of Treasury securities to meet large "day one" outflows. For firms with significant capital market activities, wholesale operations, and institutional clients (such as hedge funds), this scenario is not just theoretical. In the global financial crisis, several firms experienced outflows exceeding tens of billions of dollars in a single day.
The LCR does not capture these on-the-ground realities. But supervision does. Under Regulation YY's enhanced prudential standards, large firms are required to conduct internal liquidity stress tests (ILSTs). Supervisors expect firms to estimate day-one outflows and to ensure that their liquidity buffers can cover those outflows without reliance on the Federal Reserve. For firms with large day-one outflows, reserves can meet this need most clearly.
Yet it is worth remembering that a principal reason for the Federal Reserve's creation was to facilitate the movement of reserves when needed from banks with an excess reserve position to those in need of reserves.8 Indeed, it is the reason we are called the Federal Reserve. I do not think that is a fact of purely historical interest. Excessive friction in the movement of cash in the financial system was likely a contributor to the market dislocations of last September. In that regard, I think it is worth considering whether financial system efficiency may be improved if reserves and Treasury securities' liquidity characteristics were regarded as more similar than they are today—that is to say, that reserves and Treasury securities were more easily substitutable in the context of liquidity buffers. To be clear, the ideas I will discuss do not involve any decrease in banks' liquidity buffers. Rather, I want to explore options that would maintain at least the level of resilience today while also facilitating the use of HQLA beyond reserves to meet the immediate liquidity needs projected in banks' stress scenarios.
Another approach could be to set up a new program or facility: For example, there has been much discussion among market participants, as well as policymakers, about the potential benefits of setting up a standing repurchase agreement, or repo, facility for banks and how such a facility could improve the substitutability of reserves and Treasury securities for these firms.11 While this option is still of interest, there may be benefits to working first with the tools we already have at our immediate disposal.
Finally, some firms and industry observers have pointed to the surcharge for global systemically important banks, and its partial dependence on year-end inputs, as potentially exacerbating the issues I have discussed today. Preliminary analysis suggests that changing those inputs to averages may be helpful. If we were to propose that change, it would not alter the stringency of the surcharge. As such, this option is something that we are actively considering
In poche parole si stanno studiando modifiche regolatorie per rendere le obbligazioni governative USA pari alle riserve di cassa...
Following the implementation of these requirements, large banks have more than doubled their buffers of liquid assets. More specifically, our largest banks have significantly increased their holdings of assets known as Level 1 high-quality liquid assets (HQLA). Level 1 HQLA includes central bank reserves, Treasury securities, and Ginnie Mae securities.
As discussed in the original design for the LCR, all forms of Level 1 HQLA are treated as substitutes. There is no preference for reserves versus, say, Treasury securities in the calculation of the ratio.
Despite the regulatory text's equal treatment of Level 1 HQLA, we know that reserves have special characteristics when it comes to stress. Even though the Treasury market is the most liquid in the world, in an actual stress event, banks would still need to take steps to monetize Treasury securities to meet cash outflows.
However, it may be difficult to liquidate a large stock of Treasury securities to meet large "day one" outflows. For firms with significant capital market activities, wholesale operations, and institutional clients (such as hedge funds), this scenario is not just theoretical. In the global financial crisis, several firms experienced outflows exceeding tens of billions of dollars in a single day.
The LCR does not capture these on-the-ground realities. But supervision does. Under Regulation YY's enhanced prudential standards, large firms are required to conduct internal liquidity stress tests (ILSTs). Supervisors expect firms to estimate day-one outflows and to ensure that their liquidity buffers can cover those outflows without reliance on the Federal Reserve. For firms with large day-one outflows, reserves can meet this need most clearly.
Yet it is worth remembering that a principal reason for the Federal Reserve's creation was to facilitate the movement of reserves when needed from banks with an excess reserve position to those in need of reserves.8 Indeed, it is the reason we are called the Federal Reserve. I do not think that is a fact of purely historical interest. Excessive friction in the movement of cash in the financial system was likely a contributor to the market dislocations of last September. In that regard, I think it is worth considering whether financial system efficiency may be improved if reserves and Treasury securities' liquidity characteristics were regarded as more similar than they are today—that is to say, that reserves and Treasury securities were more easily substitutable in the context of liquidity buffers. To be clear, the ideas I will discuss do not involve any decrease in banks' liquidity buffers. Rather, I want to explore options that would maintain at least the level of resilience today while also facilitating the use of HQLA beyond reserves to meet the immediate liquidity needs projected in banks' stress scenarios.
Another approach could be to set up a new program or facility: For example, there has been much discussion among market participants, as well as policymakers, about the potential benefits of setting up a standing repurchase agreement, or repo, facility for banks and how such a facility could improve the substitutability of reserves and Treasury securities for these firms.11 While this option is still of interest, there may be benefits to working first with the tools we already have at our immediate disposal.
Finally, some firms and industry observers have pointed to the surcharge for global systemically important banks, and its partial dependence on year-end inputs, as potentially exacerbating the issues I have discussed today. Preliminary analysis suggests that changing those inputs to averages may be helpful. If we were to propose that change, it would not alter the stringency of the surcharge. As such, this option is something that we are actively considering
In poche parole si stanno studiando modifiche regolatorie per rendere le obbligazioni governative USA pari alle riserve di cassa...
