Banks loaded up with U.S. government debt could face a reckoning if Washington’s debt-ceiling impasse spills over into a full-blown default. Their footprint in the roughly $24 trillion Treasury market has increased fourfold in the past two decades to about $4 trillion as of March.
Banks have become key buyers of Treasurys as a way to earn income on “risk-free” assets. Since the U.S. isn’t viewed as likely to default on its debts, banks don’t need to keep extra capital against them to offset potential losses. Regulators deem the debt a “zero percent” risk weight. Lately, however, it’s been hard to dismiss Treasury Secretary Janet Yellen’s warning of “financial chaos” that could be unleashed without a deal in Washington, D.C., to increase the federal government’s $31.4 trillion borrowing limit. Yellen said on May 1 that the U.S. risks running short on funds as soon as June 1. The debt-ceiling standoff comes at a precarious time for banks
KBE,
,
specifically regional lenders struggling to retain deposits, while looking to avoid forced sales of assets that have fallen in value as the Fed began to rapidly raise rates last year. Related: U.S. could run out of cash ‘at some point in the first two weeks of June,’ CBO says Market jitters around the impasse can be seen in short-term Treasurys. Democratic Rep. Sean Casten of Illinois on Wednesday pointed to the spread of more than 300 basis points between Treasurys coming due before and after the potential default date. His remarks came during a hearing on the federal response to recent bank failures. The yield on 1-month Treasurys
TMUBMUSD01M,
5.501%
was around 5.53% on Friday, while the 3-month
TMUBMUSD03M,
5.188%
rate was pegged at 5.17%, according to FactSet. While banks have been encouraged by regulators to hold short-term Treasurys for liquidity needs, any holder forced to sell these securities into a volatile market could face painful losses. See: Treasury bills, epicenter of market’s debt-ceiling worries, reflect doubts about a resolution In addition, Casten suggested a U.S. default could leave more banks vulnerable to failure, particularly if risk weights on Treasurys were inc …
Article Attribution | Read More at Article Source