Spoiler alert: we have another red flag in the treasury market.
The latest talk is to eliminate treasury holdings from the SLR calculation, which is used to determine how much banks need to set-aside to help "Manage risk".
The rule sounds just like it reads: banks no longer had to hold any reserves against deposit liabilities.
Another handout occurred last year when we witnessed more bank failures than the 2008 GFC. The big accommodative move to save the system was to allow banks to mark their bond portfolio at "Par", to avoid taking portfolio losses.
As a result of the 2022 bond market route, the system is stuck with a pile of losses on the books.
By allowing banks to not "Mark-to-market" we lose transparency and more importantly, we lose more price discovery.
Because the government buys their own bonds, long ago we lost price discovery of the most important price of all - interest rates: the price of "Money".
The new SLR rule change could allow banks to be an endless buyer of treasury debt.
Especially as treasury issuance is testing the Covid highs even though the emergency is long gone.
Said another way, we supposedly have a strong economy, yet the Treasury is selling/issuing bonds at a rate last seen during the Covid crisis.
How convenient for the banks - to be able to buy treasuries, take no haircut, and not have to worry about mark-to-market losses.
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