Banks Forced To Buy Treasury Securities to Avoid another Crash

Bank regulators are now forcing financial institutions to hold more Treasury securities in an effort to ensure cash solvency in the event of another financial crisis, the Washington Examiner reports.

The reason given for why banks must now hold an additional $100 billion dollars of liquid assets is because these securities can easily be exchanged into cash at any time. Treasury securities are the top category for qualifying as liquid assets, although banks can fulfill the requirement through stocks, as well.

The move constitutes a major piece of regulation intended to avoid taxpayer-funded bailouts and yet another financial crash. In the event that banks need to pay back loans in a hurry, the extra liquidity will make sure they have enough cash to last for 30 days.

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Credit will now be more costly, Bill Nelson, deputy director of monetary affairs at the Federal Reserve, admitted. But for Nelson, the benefit of preventing future financial crises through increased liquidity requirements is worth it. However, the consequence of this regulation is that as bank revenue drops, regular banking costs for consumers could also rise.

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Additionally, some analysts are concerned that an increase in liquid assets might mean a corresponding crowding out of collateral needed for regular lending operations.

“Rule after rule is increasing concentration by investors, banks and others in what are called high-quality liquid assets,” said Wayne Abernathy, vice president at the American Bankers Association.

“In a stress, everyone’s going to be looking for those. When you have a shortage of something everyone wants, you’re creating the conditions for panic.”

But regardless of analysts’ concerns, the Federal Reserve board showed no hesitation, adopting the rule without any objections in a vote. Federal Reserve Chair Janet Yellen applauded the move, contending that the regulation is important and will “serve to strengthen the resilience of internationally active banking firms.” Banks are encouraged to start preparing to adopt the rule, but do not officially have to comply until January 1, 2016.


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