Halister News

(Bloomberg) -- The Trump administration last week proposed a modification to banks’ leverage ratio calculations, which would boost market-making in USTs and other capital market activities that are “low risk but balance sheet intensive,” and would have “a material impact on asset pricing,” Credit Suisse strategists led by Praveen Korapaty say in note.

• Proposed change would remove cash and Treasuries from the denominator when calculating leverage exposure, putting balance sheet cost in capital terms near zero
• Repo intermediation would become more economical, and there would be “fewer and less sustained dislocations on the Treasury spline” as periods of large one-sided flows would become less costly to manage
• Likely effects on asset prices include:
  • Tighter GC-triparty and GC-fed funds spreads
  • Wider swap spreads
  • Wider MBS basis
  • Wider corporate spreads
  • Higher fed funds in the IOER/RRP corridor
• While exemption of Treasuries would depart from current international norms, change is likely to be adopted; process is likely to take at least a year, however, pending confirmation of regulatory appointments and public comment period

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Greg Chang