Senator Elizabeth Warren said in a letter that she is concerned banks could use the ongoing turmoil in overnight funding markets to loosen liquidity rules they have long complained about.
The Federal Reserve has been pumping tens of billions of dollars into the market for overnight and short-term repurchase agreements, or repos, for several weeks. On Tuesday, the Fed swapped $99 billion of cash for securities held by banks.
In a letter addressed to Treasury Secretary Steven Mnuchin, who chairs the Financial Stability Oversight Council, Warren asked the secretary to explain the causes of the market turmoil. She pointed out that many of the early attempts to explain the disruption–including large corporates tax payments due in mid-September–either never made much sense or fail to explain why the market continues to need so much additional liquidity.
“I am also concerned that, ‘Big U.S. banks are using the recent chaos short funding markets as an opportunity to pressure the Federal Reserve to ease liquidity requirements they l1ave long despised,'” Warren wrote, quoting from a Reuters report.
The Fed imposed new liquidity requirements after the financial crisis in an effort to avoid having to bail out banks in the future. Banks are supposed to have enough liquid assets, primarily cash and Treasury bonds, that they could sustain a short-term market disruption. Prior to the new regulations, many large financial institutions were often just days away from collapse if they could not obtain short-term funding.
Many on Wall Street now believe the liquidity regulations are playing a role in the problems with the short-term funding market, encouraging banks to “hoard liquidity” rather than lend it out. And, indeed, this is quickly becoming part of the case for reforming the liquidity requirements.