Does anyone remember the SLR “cliff?” Of course you don’t, because in the end it didn’t seem to make any difference. For a few weeks, it was k

Anyone Remember That Whole SLR Cliff?

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2021-07-02 07:00:07

Does anyone remember the SLR “cliff?” Of course you don’t, because in the end it didn’t seem to make any difference. For a few weeks, it was kind of ubiquitous if only in the sense that it was another one of those deep plumbing issues no one seems able to understand (forcing all the “experts” to run to Investopedia in order write something up about it). Whatever this thing was and was going to be, it sounded ridiculously earth-shattering. And then, poof, it was gone. Banks had made a major deal out of it because, well, they don’t like it. Thus, while the world’s attention was fixed in this area, why not try to beat it back by hyping its negative potential? It was absolutely true that the SLR in this case was going to make holding safe and liquid instruments more balance sheet “expensive.” In the wake of the last GFC, in March 2020, the federal government had issued trillions in new debt while at the same time the Federal Reserve created trillions in new bank reserves. Both are asset classes which come under the latest Basel tricks intended to capture more of bank balance sheet behavior than the simple capital ratios which had proved worthless during GFC1. Not wanting to upset government funding markets nor the Fed’s QE purchase pace, authorities issued a one-year reprieve for both UST’s and bank reserves – these wouldn’t be calculated for SLR purposes. The single yearly amnesty was set to expire on April 1, thus the SLR “cliff” was in the regulation being re-applied without exception. And there had been some noticeable dealer selling in Treasuries – though it wasn’t absolutely clear the cliff was the reason for this. It may have simply been reflationary disinclination; rates were rising at the time as inflation and growth prospects seemed to have been picking up. Either way, BOND ROUT!!!!! This whole SLF cliff business, however, was misunderstood for any number of reasons but mostly pertaining to balance sheet implications. The very fact banks were using this as an excuse was meaningful in what it said about their perceptions of the situation more generally; as well as Jay Powell’s lack of response to it. Many came to believe that the Fed would end up surrendering, giving in to banks at the last minute after making some symbolic stand. I didn’t think so, and for reasons that looked a lot like experience with negative interest rates.

What is the SLR coming back for UST’s and bank reserves alike like? In this specific case, higher costs being deliberately imposed on the safest, most liquid parts of US banks’ balance sheets given what they’ve done over the past year. Understanding this, might Jay Powell be saying the same thing as he would imposing NIRP: you don’t like higher (balance sheet) costs on low-paying highly liquid and safe instruments, too bad, go out and find better returns by raising your loan book!