I'm no expert on this, but shouldn’t any large changes to the supplemental leverage ratio result in reduced equity valuations?
Check out this quote from Risky Finance from back in November. They did a great job of breaking this all down.
“The biggest forbearance measure was a move by the Fed in May to exclude treasury bonds and central bank deposits from the leverage exposure measure. That wiped $2 trillion off the SLR denominator, including $619 billion at JP Morgan alone."
"Just one of the regulatory changes implemented by the fed in the response to the economic shutdowns would have reduced the denominator (total assets) for calculating the SLR by $3 trillion for the 6 largest banks (regulatory balance sheets)..."
"...without three critical forbearance measures, some banks such as Citigroup or Goldman Sachs would have been just 30 basis points away from the minimum, which would prompted the Fed to restrict their trading and lending activity.”
To calculate the SLR, just divide the Tier 1 Capital by a bank’s assets.
So Tier 1 Capital=reserves, common equity, plus retained earnings.
In the past, when the banking industry was much more competitive, it was common for banks to market themselves on their surplus (reserve) in order to attract new customers.
Changes to the leverage ratio can also lead to very large increases, or decreases, to a banks’ ability to lend.
To put that into perspective, according to Thomas Hoenig, a former Vice Chair of the Federal Deposit Insurance Corporation, if share buybacks of $83 billion, representing 72% of total payouts for the top 10 BHCs in 2017, were instead retained, under current capital rules, this could have increased small business loans by $750 trillion, or mortgage loans by almost $ 1.5 trillion...
But what does this all mean for the stock market? Well, if J.P. Morgan is going to be adding roughly $619 billion back to the assets used for calculating this leverage ratio, it should theoretically reduce the amount of credit that will be available for investors to speculate. This, of course, would not be a good thing..
Back in November, a top analyst at JPM seemed to support this idea when he argued that liquidity had become such an important factor for stock market valuations that further lockdowns could actually become bullish--and not bearish—for markets.
To most average people, lockdowns being a bullish signal for the stock market seems to stand in the face of reason, but according to this analyst, the possibility of increased quantitative easing from the Fed as a reaction to the lockdowns..(a sort of “Jpow” effect, if you will, to steal a quote from wallstreetbets), was strangely much more important than real economic activity, if you can believe that..
"Although it has had a negative impact in the short term, the reemergence of lockdowns and resultant growth weakness could bolster the above equity upside over the medium to longer term via inducing more QE and thus more liquidity creation."
May 15, 2020, Federal Reserve Press Release
“The temporary modifications will provide flexibility to certain depository institutions to expand their balance sheets in order to provide credit to households and businesses in light of the challenges arising from the coronavirus response.”
Again, I'm no expert, but with fed policy playing such important role in market dynamics these days, it definitely seems like something one should be keeping track of.
Cheers, and good luck.
“The interim final rule is effective as of the date of Federal Register publication and will remain in effect through March 31, 2021.”
Check out this quote from Risky Finance from back in November. They did a great job of breaking this all down.
“The biggest forbearance measure was a move by the Fed in May to exclude treasury bonds and central bank deposits from the leverage exposure measure. That wiped $2 trillion off the SLR denominator, including $619 billion at JP Morgan alone."
"Just one of the regulatory changes implemented by the fed in the response to the economic shutdowns would have reduced the denominator (total assets) for calculating the SLR by $3 trillion for the 6 largest banks (regulatory balance sheets)..."
"...without three critical forbearance measures, some banks such as Citigroup or Goldman Sachs would have been just 30 basis points away from the minimum, which would prompted the Fed to restrict their trading and lending activity.”
To calculate the SLR, just divide the Tier 1 Capital by a bank’s assets.
So Tier 1 Capital=reserves, common equity, plus retained earnings.
In the past, when the banking industry was much more competitive, it was common for banks to market themselves on their surplus (reserve) in order to attract new customers.
Changes to the leverage ratio can also lead to very large increases, or decreases, to a banks’ ability to lend.
To put that into perspective, according to Thomas Hoenig, a former Vice Chair of the Federal Deposit Insurance Corporation, if share buybacks of $83 billion, representing 72% of total payouts for the top 10 BHCs in 2017, were instead retained, under current capital rules, this could have increased small business loans by $750 trillion, or mortgage loans by almost $ 1.5 trillion...
But what does this all mean for the stock market? Well, if J.P. Morgan is going to be adding roughly $619 billion back to the assets used for calculating this leverage ratio, it should theoretically reduce the amount of credit that will be available for investors to speculate. This, of course, would not be a good thing..
Back in November, a top analyst at JPM seemed to support this idea when he argued that liquidity had become such an important factor for stock market valuations that further lockdowns could actually become bullish--and not bearish—for markets.
To most average people, lockdowns being a bullish signal for the stock market seems to stand in the face of reason, but according to this analyst, the possibility of increased quantitative easing from the Fed as a reaction to the lockdowns..(a sort of “Jpow” effect, if you will, to steal a quote from wallstreetbets), was strangely much more important than real economic activity, if you can believe that..
"Although it has had a negative impact in the short term, the reemergence of lockdowns and resultant growth weakness could bolster the above equity upside over the medium to longer term via inducing more QE and thus more liquidity creation."
May 15, 2020, Federal Reserve Press Release
“The temporary modifications will provide flexibility to certain depository institutions to expand their balance sheets in order to provide credit to households and businesses in light of the challenges arising from the coronavirus response.”
Again, I'm no expert, but with fed policy playing such important role in market dynamics these days, it definitely seems like something one should be keeping track of.
Cheers, and good luck.
“The interim final rule is effective as of the date of Federal Register publication and will remain in effect through March 31, 2021.”