- Sen. Elizabeth Warren sent a letter to US Treasury Secretary Steven Mnuchin on Friday warning him to not ease bank regulations following September’s liquidity scare.
- The Democratic primary front-runner asked Mnuchin what he thinks caused the spike in short-term lending rates, and why the Federal Reserve might continue with its capital injections when banks are bringing in record profits.
- Though recent Fed actions have calmed the short-term rate, Warren said major banks’ reliance on central bank intervention sets a dangerous precedent reminiscent of the Great Recession.
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Sen. Elizabeth Warren sent a letter to US Treasury Secretary Steven Mnuchin warning him to not ease bank regulations in the wake of September’s liquidity scare.
Warren’s Friday letter asked Mnuchin what he thinks caused the spike in short-term lending rates, and why the Federal Reserve may continue to increase bank reserves when the firms are bringing in record profits.
The Democratic primary frontrunner also expressed concern that the Federal Stability Oversight Council may back efforts to loosen liquidity laws for major banks.
“These rules were designed to ensure that banks have enough cash on hand to meet their obligations in the event of another market crash,” Warren wrote. “Banks are reporting profits at record levels, and it would be painfully ironic if unexplained chaos in a small corner of the banking market became an excuse to further loosen rules that protect the economy from these kinds of risks.”
Regulations introduced in the wake of the 2008 financial crisis require banks to hold a certain amount of cash as a cushion for liquidity pressures. Large banks have lodged their complaints about the regulations, as they leave the banks with less free-flowing capital.
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The Fed has been actively calming money markets after the short-term funding rate spiked to 10% from 2% overnight in mid-September.
The central bank began monthly purchases of $60 billion in Treasury bills on October 15 to keep its key interest rate within an intended range. The Fed has also been boosting liquidity through overnight market repurchase agreement, or repo, operations since September 17.
JPMorgan Chase CEO Jamie Dimon said October 15 that liquidity laws kept the firm from releasing additional capital to calm September’s overnight rate spike.
The Fed’s actions have helped bring rates back to previous levels, but Warren said that the major banks’ reliance on central bank policy sets a scene similar to that which existed before the Great Recession.
“While the Federal Reserve has taken the necessary action to ensure that markets continue to function, I am alarmed that it has been required to engage in money market interventions that have not been used since the 2008 financial crisis,” the senator wrote.
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