As you can probably imagine, Elizabeth Warren is not enamored with the prospect of JPMorgan and others seizing on September’s chaos in short-term funding markets to lobby (figuratively or literally) for the relaxation of post-crisis regulations.
“These rules were designed to ensure that banks have enough cash on hand to meet their obligations in the event of another market crash”, Warren wrote, in a letter to Steve Mnuchin late last week. “Banks are reporting profits at record levels, and it would be painfully ironic if unexplained chaos in a small corner of the banking market became an excuse to further loosen rules that protect the economy from these types of risks”.
During JPMorgan’s Q3 call, Jamie Dimon made a series of remarks suggesting that some of the blame for last month’s repo debacle should be placed at the feet of regulators.
“We have a checking account at the Fed with a certain amount of cash in it. Last year, we had more cash than we needed for regulatory requirements”, Dimon said, responding to a question from Evercore’s Glenn Schorr, who asked why JPMorgan didn’t step in to ease the squeeze. Dimon continued:
That cash, we believe, is required under resolution and recovery and liquidity stress testing. And therefore, we could not redeploy it into repo market, which we would’ve been happy to do. And I think it’s up to the regulators to decide they want to recalibrate the kind of liquidity they expect us to keep in that account.
Late last month, former Minneapolis Fed chief Narayana Kocherlakota penned a Bloomberg Op-Ed that essentially blamed the post-crisis regulatory regime for the seizing up of funding markets. Regulations, he fretted, have “disrupted some of the system’s most basic functions”.
To be clear, Warren would rather be “dead in a ditch” (to quote Boris Johnson) before she would allow the Financial Stability Oversight Council – chaired by Mnuchin – to support any push by the big banks to roll back regulations on the excuse that doing so is the best way to ensure that more “anomalous” disruptions in funding markets don’t pop up.
For now, the Fed clearly prefers to use its own balance sheet and temporary open market operations to alleviate the stress, rather than go the regulations route. “To combat the issue of reserve scarcity the Fed needs to shift from temporary open market operations to permanent open market operations or ease liquidity regulations”, BofA’s Mark Cabana wrote earlier this month, adding that “we are less optimistic on regulatory relief since Chair Powell’s comments at the September FOMC meeting stated that ‘we’d probably raise the level of reserves rather than lower the LCR'”.
“While the Federal Reserve has taken the necessary action to ensure that markets continue to function, I am alarmed that it has been required to engage in money market interventions that have not been used since the 2008 financial crisis”, Warren went on to say, in her letter to Mnuchin.
Now, Steve will need to respond to a series of questions from Liz no later than November 1. Among other things, Warren wants to know if FSOC knows anything the rest of us don’t about why the Fed included in their announcement of organic balance sheet growth a commitment to rolling TOMOs into January.
More broadly, she wants Mnuchin to explain what happened in repo markets last month.