Secretary Mnuchin Open to Cash Crunch Funding for Big Banks

Treasury Secretary Steven Mnuchin said Tuesday he is open to loosening liquidity requirements for big banks to relieve possible cash crunches in short-term funding markets.

“The banks have raised an issue around intra-day liquidity, and that is something that makes sense for regulators to look at,” Secretary Mnuchin said in an interview.

His comments came after weeks of turmoil in overnight lending markets that banks rely on for short-term funding needs.

While he has say over general financial policy-making in Washington, the Treasury Secretary has very little direct control over the details of bank regulation. That work falls to independent banking regulators including the Fed, which so far has resisted calls to ease liquidity regulations.

The Fed was forced to step in and provide liquidity in those markets after rates suddenly spiked, its 1st intervention there since the global financial crisis. The New York Fed already extended its support to that market, committing to offer at least $75-B a day in cash injections market through 4 November

Big US banks said liquidity requirements imposed by the Fed contributed to the market issues and that those required buffers have discouraged banks from lending in those markets. Fed Chairman Powell said in September he did not believe liquidity requirements were too high.

“It’s not impossible that we would come to a view that the (liquidity coverage ratio) is calibrated too high, but that’s not something that we think right now,” he said at a press conference.

Secretary Mnuchin agrees with the Fed’s assessment that the turmoil was largely caused by a “technical issue,” but expressed openness toward broader policy changes.

It’s a reasonable question: Have we gone too far in the other direction in requiring the banks to maintain this excess liquidity for intra-day operations?,” he added.

While specific rule changes would likely have to go through a formal and lengthy Fed rule-making process, it can take a more relaxed approach when enforcing existing rules.

Earlier this month, Reuters reported that banks believed they had received the Greenlight from Fed supervisors to hold more Treasury debt and less cash, a move that could help boost liquidity in that market.

A Treasury spokesman declined to elaborate on Secretary Mnuchin’s remarks when asked, and a Fed spokesman declined to comment.

Stay tuned…