Photo illustration: Drew Angerer/Getty Staff; Aïda Amer/Axios
The banking industry has argued in recent weeks that the problems in the systemically important repo market are the result of excessive regulations and could result in larger and more damaging liquidity events in the future.
Driving the news: Sen. Elizabeth Warren wrote to Treasury Secretary Steven Mnuchin on Tuesday to call foul and request an explanation of what's really going on in the market.
Background: Rates in the repo market that banks use to access quick cash spiked last month, reaching five times their normal level.
- This prompted the Fed to step in with emergency funding, and now daily cash injections and a standing $60 billion a month facility.
- Bankers, research analysts and fund managers have worried that the turmoil portends larger problems in the equity and bond markets and could lead to a wide-ranging liquidity crisis.
What's happening: Bank lobbying groups and a handful of CEOs have said the problem stems from too much regulation of the financial sector.
- “Recent repo market volatility highlights ... how policies intended to promote financial stability can sometimes frustrate it," Bank Policy Institute chief economist Bill Nelson told Axios.
- JPMorgan CEO Jamie Dimon said last week that his bank had the capital but was unable to step in to calm the spiking repo market because of liquidity requirements.
- State Street CEO Ron O'Hanley said Saturday that regulations will lead to more liquidity issues.
Between the lines: In her letter to Mnuchin, Warren said she's not buying the argument and the Treasury Department and Financial Stability Oversight Council, which Mnuchin chairs, should not buy it either.
- “Banks are reporting profits at record levels, and it would be painfully ironic if unexplained chaos in a small corner of the banking market became an excuse to further loosen rules that protect the economy from these types of risks.”
- Just last week, the Fed and four other regulatory agencies approved the rollback of some restrictions on banks' adherence to the Volcker rule.
Warren isn't the only one who's dubious of the banks' cries for reduced regulation. Minneapolis Fed President Neel Kashkari told Axios that his patience is "basically gone" for bank complaints about reduced liquidity.
- Kashkari points to the Fed already providing a discount window where banks can access cheap emergency funding to deal with exactly the sort of liquidity squeeze that hit the repo market.
- "The banks are using this as a manufactured crisis," Americans for Financial Responsibility policy director Marcus Stanley told Axios. "They do that all the time and they’re doing it here. ... We’ve seen the damage that deregulated finance can do and it’s very extreme and long-term damage."