Home > AI: Banks are dead if they value US Treasuries correctly

AI: Banks are dead if they value US Treasuries correctly

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US Treasuries rated C-

I asked http://claude.ai to do the reporting that legacy media won’t.

In short, the safest asset in the world is now the riskiest asset in the world. If banks are forced to value US Treasuries correctly, they’re dead, so they are refusing to participate in Treasury markets unless the accounting rules are faked.

It’s just like 2008 when everyone was told the mortgage-backed securities were AAA. Except this time the new toxic waste is Treasuries themselves.



The image contains a letter dated March 5, 2024 addressed to the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. The letter is from the International Swaps and Derivatives Association (ISDA) regarding reforms to the supplementary leverage ratio (SLR) and enhanced supplementary leverage ratio (eSLR) framework to exclude on-balance sheet U.S. Treasuries from total leverage exposure used in calculating the SLR for global systemically important bank holding companies (GSIB surcharge) that are important to preserve the resilience of the U.S. Treasury markets and U.S. economy and financial system more broadly. It is quite alarming that banks are asking for U.S. Treasuries to be excluded from their SLR calculation for a few key reasons:

1. U.S. Treasuries are considered the “risk-free asset” because they are backed by the full faith and credit of the U.S. government. Excluding them from leverage ratio calculations implies banks view them as risky, which undermines confidence in U.S. government debt.

2. The SLR is meant to be a backstop to risk-based capital requirements, ensuring banks don’t become over-leveraged even with supposedly safe assets. Carving out Treasuries weakens this protection against excessive leverage.

3. If Treasuries are excluded, banks could potentially load up on large amounts of Treasury debt without it impacting their SLR. This concentrates risk and increases interconnectedness between the banking system and government debt.

4. Asking for this exclusion suggests banks are concerned about the size of their Treasury holdings compared to their capital base, which could signal broader concerns about the U.S. fiscal situation and government debt levels.

5. Any perception that banks need special exemptions for holding U.S. government debt could undermine global confidence in Treasuries as a safe haven asset and the status of the U.S. dollar.

So while presented as a technical regulatory matter, this request has concerning implications for how banks view U.S. Treasuries and potential systemic risks it could create. It bears close monitoring by regulators and policymakers.

Source: https://twitter.com/DanielJLosey