fed fomc Markets

$400 Billion By Next Summer: Analysts React To ‘QE-Lite’ (Which Isn’t QE)

But a "technical" matter...

“This action represents a necessary step that serves to fix the reserve hole the Fed dug itself into by continuing QT for too long and should firmly place the Fed back into an ‘abundant reserve regime'”, BofA’s Mark Cabana wrote Friday, in the wake of the announcement that the Fed would begin purchasing T-Bills next week at an initial pace of $60 billion/month.

The announcement was overshadowed by the unrelenting flow of news that bombarded market participants on Friday, a day that found the Trump administration effectively admitting that a series of “limited” agreements with China on trade may be all that’s feasible.

The unveil of the parameters around so-called “organic” balance sheet growth was immediately swamped by political and trade headlines, but it marked a crucial turning point in Fed policy.

Read more: ‘QE Lite’ Is Here! And It Starts Next Week…

What changed in September is that the Fed learned how easy it is to misjudge the threshold for reserve scarcity – how hard it is to observe the unobservable, if you will.

“Some banks maintained reserve levels significantly above those reported in the Senior Financial Officer Survey about their lowest comfortable level of reserves rather than lend in repo markets”, the September FOMC minutes read. “Money market mutual funds reportedly also held back some liquidity in order to cushion against potential outflows”.

Those passages underscored the futility of trying to measure reserve adequacy. “Attempts to measure where reserve scarcity kicks in were always doomed to fail, though hindsight is always 20/20”, BMO’s Jon Hill wrote, in a note out following the release of the minutes on Wednesday.

BofA’s Cabana on Friday described the Fed’s aggressive response (the $60 billion/month initial pace means they are front-loading the effort to back away from the upward-sloping part of the reserve demand curve and reestablish a buffer, rather than slow-walking it) as a “rapid shift away from repo operations to permanent balance sheet growth”. He also touts the details of the plan as “confirmation that the Fed shares our view that funding pressures were driven by ‘reserve scarcity’ vs ‘reserve distribution’ issues”.

Looking ahead, Cabana says Fed purchases could end up totaling $400 billion by mid-2020, which he notes would restore the level of reserves in the system to roughly $1.7 trillion.

(BofA)

Importantly, that would also mean the Fed could eventually convert outstanding TOMOs to permanent reserves in the course of reestablishing a buffer sufficient to cope with the kind of weekly swings which helped precipitate last month’s money market turmoil.

As we wrote on Friday, the extension of temporary OMOs through January gives the Fed more time to iron out the details of a standing repo facility. For his part, Cabana says the reserve increase telegraphed by the Fed obviates the need to introduce a standing facility at least in the near-term. The Fed now has “time to work out details of that facility which we think could be announced by end-2020”, he says.

Goldman weighed in briefly in a Friday evening note. “Assuming bills are purchased at this pace from mid-October to mid-April at the very least, this should expand the Fed’s balance sheet by about $360 billion over that time frame”, the bank said, adding that the plan “should also expand reserves by about $300 billion, all else being equal, which would over time take the total amount above the early September 2019 level (~$1.5tn) the Fed appears to be benchmarking itself to”.

How the Fed communicates around any rate cut later this month will be key. It’s possible (indeed, it’s likely) that the Fed saw more than a little utility in announcing balance sheet expansion separately.

Not only does the Fed now have an early start (albeit after being too late to avert September’s wake-up call repo squeeze) versus the expected November launch, keeping the announcement distinct from the policy statement and Powell’s press conference may help make the case that this but a “technical” matter that “regular” market participants need not concern themselves with.


 

17 comments on “$400 Billion By Next Summer: Analysts React To ‘QE-Lite’ (Which Isn’t QE)

  1. vicissitude

    I find it very difficult to believe the Fed didn’t know what was going on and find this evolving solution to be very suspect. The Fed knew everything about this 4 years ago (or more) and then didn’t know what they were doing, after implementing massive statutory/regulatory tweaking for years, months and days, hours and minutes. How is it they the Fed didn’t know what they were doing — what changed and why didn’t they adjust to something that already had been a matter of industry-wide knowledge??

    The Future of WholesaleFunding Markets
    A FOCUS ON REPO MARKETS POST U.S. TRI-PARTY REFORM
    December 2015

    The Fed’s activity in the tri-party repo market increases at quarter ends (both overnight and term) as non-U.S. G-SIBs restrict activity for reporting. While seemingly a nuance in the definition, the BaselIII leverage ratio calculates its denominator based on the quarterly average month end totals of on-balance sheet assets. The U.S.eSLR, however, also requires quarterly reporting, but on a daily average basis of on-balance sheet assets, and off-balance sheetitems use month end averages. As might be expected, the effect of these different calculations places considerable pressure on the distribution of quarter end collateral. As shown in the graph on page 23, the take up of the Fed’s RRP facility at quarter ends greatly exceeds its intra-quarter volumes.

    The Fed’s RRP facility, however, provides more to markets than managing front end rates, it gives the Fed a tool to address the collateral challenge.45 Decreases in broker dealer repo volumes, excess cash with the buy side, and Money Market Reform(described in the subsequent section) suggest that the Fed may need to maintain and/ or provide additional collateral to market participants over the short to medium term. The Fed’s current balance sheet is around $4.5 trillion in assets,46 which suggests that the RRP facility could have room to grow.

    https://www.bnymellon.com/_global-assets/pdf/our-thinking/the-future-of-wholesale-funding-markets.pdf

  2. In your ongoing comments about this, you seem to be implying some manner of conspiracy.

    As always, your input is certainly welcome, but past a certain point, we would ask that you come out and tell other readers what it is you think is amiss here, and back up any accusations with verifiable evidence.

    These cryptic remarks – which generally seem to hint at something nefarious – are being read by thousands upon thousands of people on weekly basis. The fact that you previously commented under at least a half-dozen different monikers doesn’t help.

    If your remarks are merely for informational purposes or you are genuinely trying to make sense of something you aren’t satisfied that you fully understand, that’s wonderful. Carry on.

    But, again, the incessant adoption of conspiratorial language needs to be backed up or otherwise explained.

    Thanks.

  3. vicissitude

    I know I shouldn’t get too obsessed about the SRF and the suspect nature of this, but the Fed’s job is to be totally immersed in the minutiae of anything related to money markets and as the BNY pdf indicates, they do know what’s going on, believe it or not — and this glitch last month, was not foreseen within the parameters of what had been normal.

    Hence, in another post yesterday, there was a link to the Fed adjusting a prior rule:

    Regulatory Capital Rules: Implementation of Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies

    That was also followed by:

    The Federal Reserve will announce on Thursday that it has decided against forcing US branches of foreign banks to hold a minimum level of liquid assets to protect them from a cash crunch, according to people familiar with the decision.

    https://www.alhambrapartners.com/2019/10/11/benign-neglect-check/

    Thus, ipso facto, the reason I feel this new Fed adventure is suspect, may be related to some foreign bank(s) falling apart and the possibility that foreign collateral has become a serious problem. I think during the last month, much of the repo chaos had been thought of as a general problem — but know I think the Fed rep business melted down because of something unusual outside the U.S. — could be Saudi, Russia, Turkey, BREXIT, Euro recession, but something outside the system just dramatically altered Fed policy. The end …

    • Again, you are stating conspiracy theories as though they are facts.

      Given that you put a lot of effort into your comments, and that they are on balance a value-add for other readers, we’re not going to press you any further, but we do want to point out that the language you employ is needlessly conspiratorial, and there is no evidence to support the assertion that something to do with “Saudi Arabia, Russia and Turkey” (to quote you) has anything to do with what happened during the week of September 16, and no primary dealers that we’re aware of have suggested anything of the sort.

      • vicissitude

        Ok, thanks for letting me add comments.

        I’m not attempting to point at anything political or frame anything in a conspiracy atmosphere — just pondering the possibility of foreign-related reasons that might be related to repo chaos. After all, I thought there has been a general theme lately that synchronized global growth is looking more like a recessionary possibility. In that light, there is a possibility that a foreign bank type entity may have potentially added a new dynamic into the Fed’s collateral thinking. I’m not blaming anyone or suggesting there is any conspiracy.

        I was just poking around, looking at Fed H.4.1: Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks (October 10, 2019)

        There are changes in recent foreign “stuff” I don’t know if that means anything, probably not, and additionally, here is a FRED chart that shows changes in foreign “stuff” — not sure what that indicates — probably nothing?

        https://fred.stlouisfed.org/graph/?g=p9d8

  4. vicissitude

    Re: “If your remarks are merely for informational purposes or you are genuinely trying to make sense of something you aren’t satisfied that you fully understand, that’s wonderful. Carry on.”

    Thanks, just trying to understand more and I’m specifically interested in the foreign interplay related to repo. It is difficult to consolidate this topic into easy-to-understand material and then find a place where comments can contribute to learning (about this). I’m a skeptic by nature, but always open to positive feedback and clarity!

    Fed on supply & demand: “Like other factors affecting the level of reserves in the U.S. banking system, an increase in investment in the foreign repo pool results in a corresponding decrease in reserves.”

    Fed FYI on arbitrage related to foreign entities and the possibility that foreign FBO’s have a new collateral dynamic or liquidity concern, who can say:

    In this note, we use confidential, daily data on wholesale unsecured borrowing and reserve balances to empirically document several salient features of IOR arbitrage trades.1 We show that foreign banks, which make up most of the trading volumes in these markets, keep around 99% of each Eurodollar and 80% of each fed fund borrowed as reserve balances. Larger domestic banks borrow less often and in smaller amounts, but when they borrow they keep 100% of each Eurodollar and fed fund borrowed as reserves. Finally, small domestic banks seem not to borrow for arbitrage purposes. Overall, the volume of IOR arbitrage trades is concentrated at U.S. branches and agencies of foreign banks, which are subject to lower regulatory costs relative to domestic banks because they are exempt from the premiums the Federal Deposit Insurance Corporation (FDIC) charges to insure deposits and face less stringent implementations of Basel III leverage ratios. We also find that many institutions borrow in both the fed funds and Eurodollar markets on the same day, which provides evidence that the tight correlation between the fed funds and Eurodollar rates is, in part, due to these cross-market linkages.

    As these regulatory costs differ across jurisdictions, not all banks make the same profit when conducting IOR arbitrage trades. Specifically, foreign banking organizations (FBOs) are exempt from the FDIC insurance premiums domestic banks face to insure deposits.7 A further relevant regulatory differentiation is the implementation of leverage ratio calculations. Most foreign jurisdictions calculate leverage ratios using either month-end or quarter-end snapshots of banks’ balance sheets, in contrast to the U.S. implementation which relies on daily averages. As a result of those calculation methods, most FBOs are constrained by their leverage ratio only at month-ends, meaning that they can ignore the leverage ratio implications of borrowing wholesale funds during the month by deleveraging at month-ends.8

    https://www.federalreserve.gov/econres/notes/feds-notes/interest-on-reserves-and-arbitrage-in-post-crisis-money-markets-20180301.htm

    Me lost @ FRED https://fred.stlouisfed.org/graph/?g=p9dD

  5. vicissitude

    This long post is part of a longer effort from Cumberland Advisors (who ever they are) and sort of helps provide some interesting repo background in terms of where we are today. Sorry to post such a long piece, but it’s nice to be able to keep some things in context and although it’s sort of a hodgepodge, it gives me a larger perspective on the foreign relationship with the Fed acting as a global money funnel. One of the reasons I remain skeptical or curious about the Fed’s new QE effort is that during the Great Recession, it seemed as-if U.S. taxpayers were doing a lot of work to synthetically support failing and weak foreign banking conglomerates — and I have this feeling that one of the key reasons that the Fed wants to start a SRF is provide special support to weak foreign banks. That is just a wild uneducated opinion, but at the heart of my curiosity. The concept of morale hazard may be a two-edged sword and maybe in helping provide global monetary stability, the Fed is justified to act as a superhero, but it also opens up a door to support institutions that abuse the system and place greater risk into the system. he Too Big To Fail banks were in large part more of an evil force than a force of good 12 years ago — and as we’ve all witnessed, trillions in QE did very little but help nurture a larger percentage of billionaires — who now, probably need our help again, because they’re systemically important.

    LCR: Is the Fed’s Balance Sheet Too Small

    A third anomaly results because of the FDIC rules that govern American banks but do not apply to American subsidiaries of foreign banks. Remember that both sets of banks are covered by Basel III rules and the need to meet LCR tests. The Fed is actually becoming more stringent than its national counterparties in other jurisdictions. The Federal Deposit Insurance Corporation (FDIC) charges an American bank 15 bps on total assets. Thus, the American bank receives 50 bps, pays 15 bps, and nets 35 bps.

    The large customer of a large American bank knows those details. That customer expects its commercial bank to pass through the net 35 bps as a payment on the company’s cash, with only a slight reduction for costs. If there is an American subsidiary of a foreign commercial bank depositing the same money at the Fed, the FDIC doesn’t charge the 15bps fee. Therefore the customer of the foreign bank’s American subsidiary has a 15 bps advantage over the American-domiciled bank. Were you that customer, which bank would you select to handle the transaction?

    We estimate that almost half the excess reserves on deposit at the Fed are placed there by US subsidiaries of foreign commercial banks. About 44% of total reserves are placed at the Fed by foreign-owned subsidiaries. This number allows us to estimate how much of the total reserve is required and then to guess at what is excess. Our guess is that nearly half of the excess reserves deposited at the Fed today originate in the American subsidiaries of foreign banks.

    In large banking transactions, 15 bps is a lot of money. Note that this rate difference delivers an advantage to a large commercial banking enterprise housed outside the US versus an American competitor. Also note that 15 bps becomes a pricing factor on the repo structure. Repo is an alternate form of cash management. Remember that the reverse repo (RRP) is a liability of the Fed, just like an excess reserve deposit. Its use is similar, though its settlement timing and pricing are slightly different. And some agents (GSE) cannot legally deposit reserves with the Fed. In the last year, this pricing anomaly caused a significant shift. The big American banks (JPM, BoA, Citi, MS, GS, and Wells) shrunk their money fund Treasury repo by about $20 billion. Meanwhile, Swiss, German, Canadian, Japanese, and French banks grew, along with others. The total shift in one year was about $100 billion (Barclays, Crane’s Data, Federal Reserve).

    For details on RRP see the NY Fed website: https://www.newyorkfed.org/markets/rrp_faq.html. A $100 billion shift is not a lot in the scheme of a multi-trillion-sized Fed balance sheet. But the directional trend from domestic banks to American subsidiaries of foreign banks suggests that something is changing. Is it the pricing differential we are thinking about?

    This LCR computation has the function of turning an excess reserve deposit into a new version of an optional required reserve deposit. The LCR requirement is met by the election of the commercial bank. Each bank, pricing its available alternatives, determines how to comply. Our argument here is that the current worldwide pricing of alternatives favors the use of reserve deposits at the Fed. That explains why about half of the excess reserves at the Fed are placed there by US subsidiaries of foreign banks. Those foreign-owned deposits meet LCR. At the same time those banks are earning 50 bps paid in US dollars instead of paying 40 bps in euro. That 90-bps spread is serious money and may be changing agents’ behavior.
    Each of those banks has other options to meet its LCR. For example, it could own a German government bond or a US Treasury note. Either of these securities counts as 100% in meeting LCR, and neither requires the bank to raise additional capital to own. Simply put, owning a US Treasury security with a positive interest rate has a higher yield than owning a German security with a negative interest rate. We can quickly see that a foreign-exchange-rate currency risk develops between the euro and the dollar due to this construction. But is it really a risk, or is it driven by commercial transactions? We think the latter is in play now.

    Zoltan Pozsar notes that, “Under the new rules, interbank deposits do not count as HQLA, and foreign banks are increasingly settling Eurodollar transactions with reserve deposits at the Fed.”

    Estimates are that $2 trillion is needed to meet the LCR requirements of American banks by the start of 2017. That number is also expected to grow every year. In the Dodd-Frank Replacement Plan, House Financial Services Committee Chairman Jeb Hensarling wants to replace capital requirements with a higher LCR. That change might, if enacted, add $700–$800 billion to the demand for reserves.

    Then, some $300 billion is needed to provide the US Treasury with cash. That number is expected to grow to $500 billion.

    Add the numbers and we have a starting estimate of nearly $5.5 trillion as an optimal equilibrium size of the Fed’s balance sheet by the end of 2016. We estimate the growth requirement at about $300–$400 billion each year. But there has been no growth since QE stopped.

    Therefore, the Fed’s balance sheet is currently $1 trillion under the equilibrium estimate. The results show up in the pricing of other assets. If reserve assets are scarce, then the prices of substitutes should be bid up, and rates should fall. The shift in the yield curves and the widening spread support this conclusion.

    Is it any wonder that yield curves are flattening? That is happening both in the US and in NIRP countries. And the spreads we talked about are widening between the dollar term structure and the others.

    What if the Fed hikes the 50-basis-point IOER rate to 75 basis points? The spread widens more. The curve flattens more.

    Our thought is that the Fed needs to expand the size of its asset holdings by several trillions as it goes about raising interest rates in the US. Our projection is that such activity could make the US yield curve very flat. Every time the Fed hikes, the curve will flatten. Every time the spread widens between NIRP countries and the Fed, the distortion intensifies. And the act of the Fed’s buying assets will also flatten the curve; but it will, at least, provide the world with the dollars it seeks in order to meet LCR. We are suggesting that the Fed needs to increase the volume of the scarce LCR-qualified resource every time it raises the policy rate (IOER).

    https://www.cumber.com/lcr-is-the-fedas-balance-sheet-too-small/?pri

    Since 1973, Cumberland Advisors has been a trusted source for market expertise … — The above seems to be from around 2016?

  6. vicissitude

    An additional hint in the story below speaks to why I remain skeptical of the Fed’s SRF and setting themselves up to be the lender of last resort — for global banks entities that need to be bailed out. This shadow topic is similar in nature to piercing the foreign corporate veil, e.g., countries like China that have corporations listed on US stock exchanges, are not required to have GAAP accounting — and then we end up with pensions linking themselves to risks nobody understands, sort of like CDO Square stupidity. Perhaps this is mixing apples and oranges, but why should US taxpayers, through the Fed help out foreign entities that don’t play by our rules? Yes, I realize most US companies fail the GAAP test too, but wasn’t the point of TARP and all the QE trillions spent on saving bad businesses supposed to amount to more than a free pass around the Monopoly board. Did the Fed create a game where crime pays and taxpayers always lose? It’s absurd to suggest that the Fed didn’t know what they were doing with IOER and from the very start of that charade, the timing was suspect, as-if to call attention to the QE door that needed to be opened for foreign banks — in order to welcome them with open arms and special terms, so that they could gain more leverage in the money markets … but why? Why do foreign banks need their arbitrage to be so-sponsored by the Fed?

    The Real Cost of the 2008 Financial Crisis
    September 10, 2018

    An international banking disaster was avoided only because the Fed agreed to provide its European counterparts with virtually unlimited dollars through currency-swap arrangements, and to give troubled European banks access to various emergency lending and loan-guarantee facilities that it established in the United States. “The U.S. Federal Reserve engaged in a truly spectacular innovation,” Tooze writes. “It established itself as liquidity provider of last resort to the global banking system.”

    But the Fed hid much of what it was doing from the American public, which was already choking on the U.S. bank bailout. It wasn’t until years later, as a result of the Dodd-Frank financial-reform act and a freedom-of-information lawsuit filed by Bloomberg News, that the details emerged. The sums involved were huge. According to Tooze’s tally, the Fed provided close to five trillion dollars in liquidity and loan guarantees to large non-American banks. It also provided roughly ten trillion dollars to foreign central banks through currency swaps. As with the seven-hundred-billion-dollar bailout for domestic banks, practically all this money was eventually repaid, with interest. But, had the full scope of what the Fed was doing emerged at the time, there would have been an uproar. Fortunately for the policymakers, there was no leak. An official at the New York Federal Reserve, which helped enact many of the covert lending programs, told Tooze that it was as if “a guardian angel was watching over us.”

    In September, 2012, Draghi announced that the E.C.B. was now prepared to buy bonds issued by individual eurozone countries, a move that finally created a Fed-style lender and buyer. (He’d convinced Merkel and her finance minister that there was no alternative.) At the same time, the members of the eurozone set up a permanent bailout fund, the European Stability Mechanism, with a lending capacity of five hundred billion euros. “The Draghi formula—America’s formula—was self-fulfilling,” Tooze writes. “The markets stabilized. The eurozone was saved by Americanization.” On either side of the Atlantic, the enduring question was: At what price?

    Nobody can say for sure where the next financial crisis will come from. But Trump and the G.O.P. are busy hastening it along—even as they’re undermining the architecture needed to deal with it.

    https://www.newyorker.com/magazine/2018/09/17/the-real-cost-of-the-2008-financial-crisis

  7. vicissitude

    To close this episode out, the reason I don’t trust the Fed or Treasury does go back to the bail outs — and after 12 years or so of not seeing much return on trillions spent, why is it so weird to think this latest IOER drama is not another round of outright theft? When did the Fed and Treasury become so trustworthy — and why would anyone buy into the concept of QE lite and sort of look the other way, because it’s too complicated. Too complicated is another name for lack of disclosure that drove the bailout engine off the cliff. Instead of IOER being a non-story or behind the scenes non-event, it’s now supercritical and all the experts agree 100% that the Fed has to start a liquidity program — and drop rates and feed the poor banks. I’m not buying this and looking back at an old Rolling Stone article is a helpful reminder that the Fed and Treasury are full of shit! It’s worth re-reading in full!

    ==> “People talk about how these were loans that were paid back,” says a congressional aide who has studied the transactions. “But when the state is lending money at zero percent and the banks are turning around and lending that money back to the state at three percent, how is that different from just handing rich people money?”

    Even more disturbing, the major stakeholder in the Bahrain bank is none other than the Central Bank of Libya, which owns 59 percent of the operation. In fact, the Bahrain bank just received a special exemption from the U.S. Treasury to prevent its assets from being frozen in accord with economic sanctions. That’s right: Muammar Qaddafi received more than 70 loans from the Federal Reserve, along with the Real Housewives of Wall Street.
    Perhaps the most irritating facet of all of these transactions is the fact that hundreds of millions of Fed dollars were given out to hedge funds and other investors with addresses in the Cayman Islands. Many of those addresses belong to companies with American affiliations — including prominent Wall Street names like Pimco, Blackstone and . . . Christy Mack. Yes, even Waterfall TALF Opportunity is an offshore company. It’s one thing for the federal government to look the other way when Wall Street hotshots evade U.S. taxes by registering their investment companies in the Cayman Islands. But subsidizing tax evasion? Giving it a federal bailout? What the fuck?

    https://www.rollingstone.com/politics/politics-news/the-real-housewives-of-wall-street-246430/?print=true

  8. Having read the exchanges between Vic and H ……….here I can say both were very interesting… and well worth a re read… There iare tremendous differences in attitude and approaches and taking in context of ( older) past remarks a difference in focus generally. One of you believes that stability of the system is the paramount goal due to dire potential future consequences….the other believes the system has been Doctored by incessant band aid approaches for what seems forever…It is apparent both of you know this stuff better than do I and most other readers (even on this site).
    One similarity does exist though (again simplified by myself…..sorry H..) and that is that all governments and Systems be they Political or Financial have one thing in common….That is ….THEY HAVE A PRIMARY INSTINCT WHICH IS TO STAY IN POWER…Only the means vary….
    Where the heck is Harvey when you need him on this issue…LOL

    • Yeah, i mean, my sole point is that we’ve gone to considerable lengths over the past 14 months to transition Heisenberg Report from being tilted towards an opinion-based “blog” to a fact-based “site”, so to speak.

      That’s cost us some page views (avoiding click bait titles means that we have to compete with major media outlets using fact-based headlines as opposed to bombast, which in turn means our coverage of major political events is swamped in search results), and it’s also cost us some engagement, as fact-based reporting by its very nature doesn’t stir up much debate among visitors.

      But, it was a critical transition for us to make, because maintaining an opinion-based, click warehouse is exhausting from an editorial perspective, and that goes triple for opinion-based financial content, because unlike opinion-based political content, it’s possible to actually be wrong when you’re talking about markets and especially “deep” finance. The last thing we want to do is post something erroneous and have someone complain.

      Point being: Heisenberg Report is a bit more “dry” now than it was in 2017 and early 2018, and that’s on purpose. That bent also gets reflected in my personal responses to comments on occasion.

      Over the long run, though, the goal is to have a site that people can check for reliable information on markets, finance and politics without having to worry about whether what they are reading is just something we conjured up based on speculation or something we cobbled together to fit some theory we had. (Our political coverage is always – always – fact-based, even as it is, obviously, written with a liberal bias). A lot of the coverage of sellside research you read elsewhere is slanted to fit a specific narrative as opposed to being presented in the way it was originally intended.

      Me personally (as the guy who writes the vast majority of what we post), i’d rather be writing the kind of stuff this Vicisstitude commenter is posting, But as a small operation looking to establish credibility with readers who might not have time to weigh whether or not a guy writing under a pseudonym is or isn’t just rambling for the sake of hearing himself talk, I have to err on the side of “Here are the facts, based on a straightforward reading and here are some real-time, current quotes from a handful of reputable sources.”

      Most of the links Vicisstitude posts are also to reputable sources, and they are certainly worth checking out if you have the time.

      • H…..no one should ever question is your integrity or attempt at factual basis…and I bet very few ever do…Sometimes ‘this stuff ‘ gets really complicated to the point it takes on a subjective basis… When that occurs the rest of us get help from some of your steady participants… Your efforts are worth their weight in Gold (figuratively meant here) Thanks

      • vicissitude

        First off, thanks for allowing me to post all these things. At this point, these comments are sort of buried in the shadows, which may be appropriate, because this is getting more and more abstract. In fact, this seems like a geometric fractal that tiles out into new weird shapes that are change in scale with each new perspective.

        Going from curiosity on the initial repo chaos and then looking deeper does stray from your original posting updates, but I do hope to add new perspectives, mainly just because a lot of the connections don’t seem logical and I love abstraction.

        One of the branches that I was looking at yesterday, was my confusion as to why the Fed was actively involved in diluting Dood-Frank regulations,a matter which many experts pointed to as one of the contributing causes of the recent repo chaos. I found an interesting path to go down, to expand on that switched-up regulation implementation — and low and behold it is politically motivated and obviously connected to banks that want less regulation. No surprise there, but there remains a cloud as to why foreign banking organizations are sort of at the heart of this repo confusion (IMHO).

        ==> So, without going into detail, here’s a headline from Friday’s WSJ:

        Federal Reserve Gives Large Banks a Break on Postcrisis Rules
        Central bank eases requirements on living wills, allows large banks to file wind-down plans less frequently

        ==> Related: (Brussels, 3 October 2019) Randal K Quarles: The Financial Stability Board at 10 years – looking back and looking ahead

        “Prudential Bank Standards

        The FSB has endorsed the work of the Basel Committee that is aimed at enhanced prudential standards for internationally active banking organizations, a process known as Basel III. The main elements of Basel III are: a stronger risk-based capital adequacy framework; a leverage ratio requirement; a capital surcharge for global systemically important banks; a liquidity coverage ratio liquidity requirement; a net stable funding ratio liquidity requirement; and a large exposures framework”

        ==> And on Wed:

        SEC Approves Changes to Volcker Rule: On Wednesday, SEC Chairman Jay Clayton announced that the agency was joining the FDIC, OCC, and CFTC in approving revisions to the Volcker Rule’s ban on proprietary trading

        ==> Looking back: (May 16 2018) Quarles* set out an ambitious agenda for overhauling banking regulations. He said that he’s seeking “meaningful simplification” of the steps banks need to take to make sure they can absorb losses. He said the TLAC regulations — which demand a supply of long-term debt that each firm can use for recovery and recapitalization after a failure — would be among those revised.

        *(The vice chairman, appointed by President Donald Trump, has been on a campaign to revise rules put in place after the 2008 financial crisis — arguing they can be made more efficient without making them weaker.)

        ==> Ok, so the Fed changing gears and diluting Dood-Frank is a political process, one which gets deeper, if you didn’t follow anything during all the chaotic tweet storms:

        G-SIB Surcharge ==> Oh, it is political after all:

        The evidence shows that higher capital standards and related regulatory improvements are not harming U.S. banks. In fact, banks are making record profits, on average of $167 billion annually the last three years. And that was before Congressional Republicans slashed the corporate tax rate for U.S. G-SIBs, giving the largest banks a windfall of more than $15 billion this year, and billions more to come in the years to follow.[6] In fact, the industry made a record $60 billion in profits in just the second quarter of 2018.[7]

        https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=401611

        ==> Ok, it’s political and confusing, but what about this:

        Regulatory Capital Rules: Implementation of Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies

        A bank holding company whose measure of systemic importance exceeds a defined threshold would be identified as a global systemically important bank holding company and would be subject to a risk-based capital surcharge (GSIB surcharge). The GSIB surcharge is phased in beginning on January 1, 2016, through year-end 2018, and becomes fully effective on January 1, 2019.

        ==> That surcharge rule was also unplugged last week by the Fed and somewhere above in the weird comments, there’s a bit about how foreign bank operations are gaming repo, because they can make more arbitrage profits and game the Fed/Treasury — but the Fed knew about that for years, which apparently goes back to the Congressional Democrats wanting the Fed to maintain a surcharge, charged to foreign banking operations that abuse the Fed repo system — which makes one wonder why the foreign banks actually need food stamps …

        ==> So, even if this political and nobody gets economic inequality in America, the boneheads across the pond are also confused:

        ==> (2 October 2018) Overall, the empirical evidence in the study suggests that the G-SIB framework has incentivised G-SIBs to decrease their risk score in the long run as intended. However, it also shows that the regulatory context might have incentivised some banks to window dress, which could distort the relative ranking of banks’ systemic importance and have adverse effects on the functioning of capital markets and the provision of financial services. Further investigation could thus be warranted to understand whether an alternative metric for the risk score calculation – based on averaging rather than year-end data – might help to avoid the unintended consequences of the G-SIB framework while guaranteeing a smooth decreasing trend in the banks’ level of risk.

        https://www.ecb.europa.eu/pub/financial-stability/macroprudential-bulletin/html/ecb.mpbu201810_02.en.html#toc1

        And just to top off this shadow comment section, here’s a few added tidbits that add more color to this confusing abstract fog:

        THE COMMON EQUITY PROBLEM IN BANK REGULATION
        YESHA YADAV (2016)

        Yesha Yadav’s research interests lie in the area of financial and securities regulation, notably with respect to the evolving response of regulatory policy to innovations in financial engineering, market microstructure and globalization. Before joining Vanderbilt’s law faculty in 2011, Professor Yadav worked as legal counsel with the World Bank in its finance, private-sector development and infrastructure unit, where she specialized in financial regulation and insolvency and creditor-debtor rights.

        This trend towards “common ownership” of U.S. public companies
        by a small group of major stockholders extends to the U.S. banking
        industry. In their seminal work in antitrust economics, Professors Azar,
        Schmalz and Raina observe a high degree of common ownership in the
        largest six U.S. banks. They note that ownership concentration in the
        banking industry – meaning, the extent of common ownership and how
        extensively banks own shares in each other – correlates with higher prices
        for certain banking products.17

        In its third iteration, Basel III imposes higher required levels of
        common equity for banks, with extra safety buffers and counter-cyclical
        capital charges mandated for the largest, most systemically significant
        global banks. Tellingly, Basel III introduces a new category of gold-plated
        capital – the Common Equity Tier 1 (or CET 1) that focuses on common
        shares, the share premium attached to equity as well as retained earnings.97
        Preferred stock is not included within this calculation.98 In addition to
        formalizing common equity as the top-tier capital type, Basel III requires
        an increase in the Tier 1 and CET 1 buffers for banks. Rather than keep to
        a thin 4% Tier 1 buffer, Basel III requires that common equity (CET1)
        alone fund a minimum reserve of 4.5% of risk-weighted assets (RWA) and
        a capital conservation buffer of 2.5%. Large global banks may also be
        asked to hold 0%-0.25% CET as part of a countercyclical capital buffer
        and another 0%-2.5% CET as a charge to account for the risk created by
        their size and stature. When finally implemented, Basel III should thus
        cause the largest banking firms to retain a minimum of 12% capital in the
        form of common equity at the upper end.99 On top of this, Basel III expects
        banks to keep at least 1.5% of RWA in the form of general Tier 1 assets
        and a further 2% in the form of Tier 2 assets.100
        It is notable that the Federal Reserve mandates higher-than-Basel
        CET 1 charges for eight U.S. banking groups designated as being
        systemically important for global markets (G-SIFI charge).101 Rather than
        charge its banks the Basel III-maximum of 2.5% CET 1 for being large and
        important, the Fed’s rule permits a higher maximum of between 1%-4.5%
        CET1 capital for its largest and most impactful constituents. Of the eight
        designated U.S. banks, JP Morgan is set to eventually incur the maximum
        4.5% CET1 G-SIFI charge with others paying incrementally lower charges
        depending on their size and profile. In preparation for this ramping-up of
        demand for equity, major U.S. banking groups are well on their way to
        raising the equity necessary to support their business.102

        Critical to this design is the role of the equity in the operations of
        the SPOE. The Dodd-Frank is clear in forcing equity to pay for the
        workout and wind-down of the holding company.109 Equity is the last to be
        paid as part of the OLA priority scheme.

        See: Full Rating Report Stringent SREP Requirements and Tight Capital Management

        On 28 January 2016, DB (Deutsche Bank AG) disclosed that the ECB requires it to maintain a minimum 10.25%
        CET1 ratio in 2016 as part of the Supervisory Review and Evaluation Process. Additionally, the
        bank’s G-SIB buffer is being phased to 2% by 2019 from 0.5% in 2016, bringing total CET1
        requirements to 10.75% in 2016. As at 1 January 2016, the bank had a EUR7bn buffer above
        these requirements. In our view, the bank’s 12.5% fully loaded CET1 ratio minimum target by
        2018 represents only a limited 25bp buffer over 2019 requirements. Breaching these
        requirements is likely to result in non-payment of AT1 coupons, and DB’s plan includes an
        additional EUR3bn-EUR4bn in AT1 issuance by 2018.

        https://www.db.com/ir/en/download/Fitch_on_DB_02_Mar_2016.pdf

        If all this gets through the filter, I’ll be lucky then grateful (sort of) I mean, this is not intended to piss anyone off or cause trouble, but there is this massive framework of confusion related to all the systemic global economic changes in the last 10 years, so adding repo madness to political insanity and making sense of what’s going on is challenging. I think one worry I have is the lack of disclosure that existed 15 years ago and now the new super complex overwhelming amount of dis-connected regulatory changes that are beyond comprehension — it’s as if the Fed could steal $400 billion and nobody would care …

        .

        • we’ve been over how GSIB factors in on a number of occasions. https://heisenbergreport.com/?s=GSIB

          • Also, it’s not “beyond comprehension”. There are short-end rates strategists whose job it is to write about this every, single week.

            This is getting a bit tedious at this juncture.

            Nobody is “stealing” anything. There is no “massive framework of confusion”.

            Your comments are not “buried in the shadows”, and there is no “geometric fractal that tilts out into new weird shapes that are change in scale with each new perspective”.

            This is beyond silly. There’s good information buried in some of these comments, but at this point, I think most readers will agree we’ve ventured into spam territory, troll territory or some combination of both. Either way, I’m closing the comments on this post.

  9. vicissitude

    One last effort to casting aspersions, is a question as to what the argument is for the Fed (and most likely Treasury) to have weaker Volker Rules and thus a weaker Dodd-Frank regulations in place. Oh sure, liquidity is probably an issue, but so is illiquidity in terms of ZIRP and worthless collateral.

    As the Fed enters its new era of QE-lite to possibly aid foreign entities, why is it now time to undercut regulations put in place to protect markets from bad behaviors? It’s curious that the Fed recently decided that foreign banks wouldn’t need to pay a GSIB risk-based surcharge, which fits well with the recent dilution of other regulations. What does that mean, who can say — but it sort of implies that the Fed can cut easier deals without cumbersome regulations to block their implementation of Basil lll:

    ==> These concerns about enforcement and oversight are exacerbated by the reduced metrics and other reporting, documentation, and compliance requirements. Numerous changes are made both as proposed and added on in this final rule. To name a few, stressed value at risk, daily risk factor sensitivities, and risk limit breaches need not be reported. In some cases, changes to reporting requirements make sense if experience shows a metric has little or no regulatory value. But most of these changes in the revised Volcker Rule are purportedly justified because they reduce the burden on banking entities and the cumulative effect on the ability of a regulator to monitor for compliance and potential significant issues is not addressed.

    http://www.mondovisione.com/news/dissenting-statement-of-cftc-commissioner-dan-m-berkovitz-on-volcker-rule-amend/

    Re: “SEC Approves Changes to Volcker Rule: On Wednesday, SEC Chairman Jay Clayton announced that the agency was joining the FDIC, OCC, and CFTC in approving revisions to the Volcker Rule’s ban on proprietary trading. “The amendments the commission has adopted today draw on the Volcker Rule agencies’ collective experience in implementing the rule and overseeing compliance in our complex marketplace over a number of years,” Clayton said. ”

    Also see Fed: A separate challenge for the central bank to consider is how to maintain operational and analytical readiness over the long term as current operational needs evolve. For example, the Fed had no operational experience transacting in the agency MBS market prior to the crisis. It initially relied on outside investment advisors to support its first purchase program, before eventually bringing trading operations in house and then later, developing capabilities to conduct auctions on its proprietary auction platform.30 Doing so involved building out new operational practices and procedures, legal documentation, governance and reporting processes, counterparty administration, technological systems, and scaling learning curves for both central bank staff and market participants.

    30 Previously, agency MBS operations were conducted on a commercial dealer-to-customer trading platform. The switch to FedTrade minimized operational risk, improved efficiency and competitiveness, and increased transparency around the Fed’s mortgage operations.

    Also see Fed: … daily ON RRP operations, the Desk
    offered reverse repos to a broad set of money market participants,
    including primary dealers and an expanded set of counterparties
    that includes MMFs, GSEs, and banks. The Desk’s reverse repo
    operations were conducted over FedTrade, a proprietary trading
    platform

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