The end of the Federal Reserve’s quantitative easing program and its fight against “too big to fail” banks are on a collision course in the bond market. When quantitative easing ends in October, the market for Treasurys and mortgage-backed securities will see its biggest net buyer stepping back.
But because of new regulations requiring the country’s big banks to hold more liquid assets, new buyers from Wall Street have been stepping up. Since the “tapering” of the Fed’s bond buying began in earnest in December 2013, U.S. commercial banks’ holdings of Treasury and agency securities (not including mortgage-backed securities) rose to $605 billion, a 23 percent increase. Including mortgage-backed securities, that total swells to $1.97 trillion, according to data from the Federal Reserve Bank of St. Louis.
Earlier this year, the Fed finalized a rule requiring banks to hold enough liquid, easy-to-sell assets to cover 30 days of operations should the economy get in a bind again. The rule, called the “liquidity coverage ratio,” requires banks to be mostly compliant by January 2015 and fully compliant by 2017.
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