NEW YORK/WASHINGTON: Wall Street banks believe they are getting a green light from supervisors to hold more Treasury debt and less cash after last month's volatility in overnight lending markets, three industry sources told Reuters.
In private conversations with senior bankers, supervisors have attempted to make banks more comfortable with using excess reserves to lend in repo markets rather than hold onto more cash, sources familiar with the discussions said.Banks hold regular meetings with Fed supervisors, who provide broad guidance on how to interpret regulations but do not offer formal instructions, people familiar with the matter say.
Rates for those loans suddenly spiked to 10per cent and the Fed had to step in to provide liquidity for the first time since the global financial crisis. The smooth functioning of those markets is critical to the financial system, providing banks with the short-term funding they need to trade and lend.
Banks can park those excess reserves at the Fed, either in idle cash or by buying Treasury bonds. Both are regarded as"high-quality, liquid assets" in formal regulatory requirements. However, many banks believed the Fed preferred cash over Treasuries, based on private supervisory feedback they received.
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