BPI Blog Posts on CECL, CCAR, LCR, and Fed Balance Sheet

BPI Blog Posts on CECL, CCAR, LCR, and Fed Balance Sheet

Monetary Policy Analysis > BPI Blog Posts on CECL, CCAR, LCR, and Fed Balance Sheet

To: Monetary Policy Analysis Distribution List
Date: January 28, 2019
From: Bill Nelson
Subject: BPI Blog Posts on CECL, CCAR, LCR, and Fed Balance Sheet

Over the past week, BPI research published two blog posts that together just about cover the landscape of bank regulatory issues, so you might find one or both relevant, perhaps even interesting.

On January 24, Francisco Covas posted a blog “CECL and Stress Tests: A Dangerous Mix.”

The post shows that banks’ stressed capital requirements would have increased by a significant amount had the Federal Reserve incorporated CECL in the 2018 comprehensive capital analysis and review (CCAR) and assumed perfect foresight. The increases would have been especially large for banks that make loans with longer tenors or banks that have a greater share of loans in retail portfolios.  The mechanism by which CECL has an impact under stress is driven by the high sensitivity of loan losses to the economic outlook and the procyclical nature of CECL.  The results also underscore the importance of offsetting the impact of CECL on non-stressed (or spot) capital requirements.

And on January 25, I posted a blog “BPI Symposium on Interactions Between Fed Normalization, Money Market Conditions, and Bank Funding and Liquidity.”

The post summarizes a BPI symposium, held on January 17, on how the interaction between the Fed’s declining balance sheet and bank liquidity requirements is impacting money and deposit markets, and the resulting implications for the Fed’s longer-run monetary policy implementation framework. The symposium was attended by leading market participants from GSIBs, FBOs, regional banks, hedge funds, and mutual funds; academics, press, and Fed staff and was divided into three panels:  money market conditions, bank funding and liquidity, and the Fed’s implementation framework.  A few of the points that were discussed:

  • Rigidities caused importantly by regulations drove extraordinary price movements at year-end raising the possibility that there could be severe volatility in financial markets in future periods of stress.
  • Large banks are attracting and keeping retail deposits without paying up for them by offering an array of associated digital services, calling into question the long-term viability of the community bank model.
  • Minimum holdings of excess reserves are driven to a surprising extent (at least to me) by intra-day funding needs.  One participant suggested monitoring the timing of banks’ payments as a measure of tightness of the market for excess reserves.  If banks start throttling payments until later in the day, reserves are getting scarce.
  • FHLB advances serve as a key means by which banks are buffering shocks to reserves; this stuck me in part because FHLB advances can’t address an aggregate shortfall in reserves.
  • Most participants guess the terminal level of excess reserves is $1¼ to 1½ trillion, not far below the current level of $1.6 trillion. At the same time, many argued that the amount could move lower as institutions react to the higher cost of reserves when they become marginally scarce.
  • One Treasurer noted that he is spending 90 percent of his time explaining to various people what he is doing the other 10 percent of the time.


Disclaimer: The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Bank Policy Institute or its membership, and are not intended to be, and should not be construed as, legal advice of any kind.