Fed’s Quarles agrees with JPMorgan CEO Dimon on cause of repo-market chaos

Randal Quarles, the Federal Reserve’s point male on banking guidance, appeared to agree JPMorgan Chase & Co.

JPM, +0.07%

CEO Jamie Dimon on Wednesday, stating a few of the guidelines put in place in the after-effects of the monetary crisis contributed to the current turmoil seen in short-term loaning markets.

” We have actually recognized some areas where our existing supervision of the regulative structure … might have developed some incentives that were contributors” to the stress, Quarles informed the House Financial Providers Committee.

” They were probably not the definitive contributors, however they were factors and I believe we need to examine them,” he said under questioning from Rep. Patrick McHenry, a Republican from North Carolina, who is the ranking Republican politician on the House panel.

The postcrisis guideline was intended to make banks indifferent on whether they abided by short-term capital requirements with reserves they park at the central bank or with other short-term securities like Treasurys, Quarles stated.

However in practice, the Fed’s guidelines appear to have had an unintentional repercussion of putting “a thumb on the scale for reserve bank reserves,” to fulfill the requirements, Quarles said.

Banks have actually an estimated $1.4 trillion in excess reserves parked at the Fed, according to a in an article in the Yale Journal of Guideline about repo loaning. In mid-September, the Fed was shocked that banks didn’t use some of these reserves to provide to other financial institutions facing funding lacks.

When money-center banks failed to step up to provide, overnight lending rates increased by 10%. The Fed, eventually, was required to step in and use loans through short-term repo financing for the very first time since the 2008 monetary crisis. The reserve bank has actually now extended this financing program into 2020.

Some market specialists are fretted about the scope of the Fed’s lending to the repo market.

Read: The repo market is ‘broken’ and the Fed injections are not a lasting option, market pros warn

In a speech in October, Dimon stated the chaos may be a precursor of a bigger crisis if the Fed doesn’t adjust its guidelines. He said the liquidity requirements bind what was seen as excess reserves.

See: Dimon says money-market chaos dangers changing into crisis

Other experts believe that changes to reserves or its removal outright may be required in the future to avoid further financing problems.

Marcelo Prates, an attorney at the Central Bank of Brazil, stated that the Fed may want to consider phasing out the use of central-bank reserves to meet regulatory requirements. The lawyer stated this would entail a recalibration of regulatory minimum ratios for liquidity requirements. “Stopping working to do so might wind up weakening the extremely purpose of these rules: to make the monetary system more resistant,” Prates stated in the repo-lending Yale article.

Prates said another option is a long-term standing repo center to allow banks to transform Treasurys to reserves on demand at an administered rate, which other experts, including Mark Cabana, head of U.S. short rates strategy for Bank of America, have actually advocated in favor of.

Obviously, some have stated that require modifications to reserve guidelines would likely benefit banks and potentially increase threat in the financial system. Sen. Elizabeth Warren, Democrat from Massachusetts, who assisted to craft the federal government’s response to the crisis said that huge banks were simply looking for an excuse to loosen capital guidelines “that secure the economy.”

Read: Warren cautions big banks will try to eliminate capital rules they despise

The Fed does not speak to one voice on regulatory issues. New York City Fed President John Williams, whose regional bank oversees the financial market, has said his bank was taking a look at the current September episode but up until now hasn’t discussed any results or conclusions from it.