Where quarterly rate's spikes are discussed again!
Why trying to introduce a complex cure for a symptom when there is a simple cure for the disease? This is the question I was asking myself when reading about the Fed and SOFR (repo rate) month-end spikes. The month-end spikes are not a natural economical cycles. They are artificial ones created by the regulators. Balance sheets, liquidity ratios and some other regulatory figures are measured on a monthly or quarterly basis. The quarter ends are becoming important dates for banks. As banks are an important cog in the economy, quarter ends are becoming important for the economy.
As a reaction to the (repo) liquidity drying at quarter end, the Fed is proposing some special repo facility to decrease the rate spikes symptoms. But these spikes are totally artificial constructions. Why are the balance sheets still measured only on quarters end only. Nowadays everything in banking seems to be real time and online, from retail payments to complex risk figures like VAR, XVA and IM. Why are balance sheet only measured quarterly? See a previous rant about this at the end of this blog. If regulators are serious about systemic risk in financial markets, why are they looking at it only one day each quarter? Would it be impossible for a bank to get into trouble in one of 59 business days of the quarter where those numbers are not looked at by regulator? When did Lehman bankrupt? Was it at month-end?
The Fed are not the only regulators of banks in the US, nevertheless the Fed’s risk-based capital surcharge may have an impact on the quarter end spikes. The Fed's repo facility proposal sound to me like road designers proposing to add some rubber in the road material just after the speed-bump they have installed on a new high-way to reduce the damage on cars from the speed bumps.
This is the visible impact on liquidity of the discrete measurement of regulatory figures, but those one-day measurements also have (less visible) impacts on risk management. Some financial institutions ask their traders to reduce their risk management activities over quarter ends as it is costly from a regulatory point of view. Is the goal of G-Sib and similar figures to reduce liquidity and risk management activities in financial institutions? If not their design should be fundamentally reviewed.
As a reaction to the (repo) liquidity drying at quarter end, the Fed is proposing some special repo facility to decrease the rate spikes symptoms. But these spikes are totally artificial constructions. Why are the balance sheets still measured only on quarters end only. Nowadays everything in banking seems to be real time and online, from retail payments to complex risk figures like VAR, XVA and IM. Why are balance sheet only measured quarterly? See a previous rant about this at the end of this blog. If regulators are serious about systemic risk in financial markets, why are they looking at it only one day each quarter? Would it be impossible for a bank to get into trouble in one of 59 business days of the quarter where those numbers are not looked at by regulator? When did Lehman bankrupt? Was it at month-end?
The Fed are not the only regulators of banks in the US, nevertheless the Fed’s risk-based capital surcharge may have an impact on the quarter end spikes. The Fed's repo facility proposal sound to me like road designers proposing to add some rubber in the road material just after the speed-bump they have installed on a new high-way to reduce the damage on cars from the speed bumps.
This is the visible impact on liquidity of the discrete measurement of regulatory figures, but those one-day measurements also have (less visible) impacts on risk management. Some financial institutions ask their traders to reduce their risk management activities over quarter ends as it is costly from a regulatory point of view. Is the goal of G-Sib and similar figures to reduce liquidity and risk management activities in financial institutions? If not their design should be fundamentally reviewed.
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