Liquidity concerns over $1t short-term treasury bills weigh on US bank stocks
ALBAWABA – Expectations that the United States (US) government will issue $1 trillion or more in short-term Treasury bills to replenish its coffers weighed heavily on US bank stocks Monday over concerns that it will drain liquidity from lenders.
Coupled with the upcoming new capital requirements regulations, as reported by Reuters and the Wall Street Journal, these measures may very well exhaust liquidity in the banking sector.
Shares of several banks in the US fell early on Monday as investors warn that the new bills will drain reserves at such a critical time when liquidity is needed, Reuters reported.
Most big US bank stocks were trading lower in afternoon trading, with the S&P 500 banking index down nearly 1 percent on Monday. JPMorgan Chase & Co, Wells Fargo & Co, Goldman Sachs Group Inc (GS.N), Morgan Stanley, Citigroup, and Bank of America Corp all dropped between 0.3 and 2 percent.
Regional bank stocks also recorded broad declines on Monday.
The KBW Regional Banking Index lost 2 percent, PacWest Bancorp was down 2.1 percent, and Western Alliance 2.3 percent.
Draining reserves negatively impacts confidence in banks, especially given the recent shocks to the financial system from the latest US banking crisis.
According to Jack Janasiewicz, however, portfolio manager at Natixis Investment Managers, these concerns may not be accurate.
Money market funds have enough liquidity to absorb huge debt issuance by the Treasury, he told Reuters.
US bank stocks fall under pressure of new capital requirements
US banking regulators, led by the Federal Reserve, are also expected to propose new regulations to raise capital requirements by 20 percent, news outlets and agencies reported.
Higher capital requirements mean more frozen liquidity, which the banks cannot access in daily banking operations, such as lending, investment, and asset growth.
A 20 percent increase means raising it to 4.8 percent overall.
According to Statista, total RWAs of the largest US banks, as of the second quarter of 2022, are estimated at $7.9 trillion.
Setting capital requirements at 4.8 percent means raising the minimum capital allocations at these top banks in total to $383.3 billion.
These are expected to be the last batch of global bank capital rules by the Basel Committee of banking regulators, which will take effect beginning of 2025, Reuters confirmed.
As to the degree to which it will affect the sector’s liquidity, AlBawaba was unable to find any relevant studies. However, the current capital requirement in the US is set at 4 percent of the bank’s Risk Weighted Assets (RWAs).
