NEW YORK–(BUSINESS WIRE)–Kroll Bond Rating Agency (KBRA) releases this month’s edition of The Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk: The After-Show.
This month’s newsletter, Bank Treasurers and the Bridge They Bought, covers the continuing struggle bank treasurers have had with their growing surplus cash, which despite the sell-off in the Treasury market and the steepening yield curve, they still prefer to leave at the Fed, where they earn interest on excess reserves (IOER). Though the pressure is mounting to shift cash into bonds, bank treasurers are still benefiting from the protective hedges and other balance sheet actions they took in the late summer and fall of 2019 to prepare for lower rates and a possible recession, without the foreknowledge of the future pandemic. However, the benefits from these actions are beginning to wear off, and so, the turn up in rates so early this year is fortuitous timing for bank treasurers who may find themselves needing to reinvest run-off in their portfolios.
The newsletter starts the discussion by connecting the steepening curve to a broader risk-on mentality in financial markets, including the rally in the equity indices, as well as in cryptocurrencies. Bank treasurers are still holding off making investments in Agency MBS, except to replace run-off. Bank treasurers said they are leery of shifting their highest quality liquid assets into less liquid assets just to pick up a few extra basis points in the front and intermediate parts of the yield curve. Also, they are very reluctant to extend duration in their bond portfolios much beyond five to seven years just to earn a higher nominal yield. The newsletter also looks at the latest developments in the front end of the yield curve, especially the cash crowding into the Treasury repo market which, on a couple of occasions in recent weeks, caused it to trade at a negative rate and today anchors the secured overnight financing rate (SOFR) at 2 bps.
The Bank Treasury Chart Deck takes a step back from the specific concerns of the bank treasury world to consider the broader economic issues that will ultimately shape the banking environment in the coming years. Starting with a look at surging food prices and linking this worrying trend to rising food insecurity and broader social unrest, the chart deck examines how food is central to the major trade flows between the U.S. and its major trading partners, including China, Mexico, and Canada, as well as exchange rates. Next, the chart deck shifts focus to corporate debt levels worldwide, before discussing the growing fiscal burdens faced by taxpayers and workers from aging populations and a growing imbalance between supply and demand for investment assets to fund retirement plans.
In this month’s edition of Bank Talk: The After-Show, Ethan argues that operational risk and its governance are likely to take center stage for bank examiners, assuming credit losses covered with reserves determined under Current Expected Credit Loss (CECL) prove as sufficient as bank managers expect they will. As an example, Ethan reviews potential changes in banking law in the current congressional session related to the cannabis industry, which he sees as entailing compliance issues related to anti-money laundering and the bank secrecy act for all banks that take advantage of the new legislation to expand its business customer base. Van and Ethan also explore how digital banking and the work-from-home phenomenon presents its own operational challenges and opportunities for costly errors to occur. In the context of technology errors, Van and Ethan talk about Citi and Revlon’s creditors, where it has been reported that Citi stands to lose more than $500 million.
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KBRA is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA. Kroll Bond Rating Agency Europe Limited is located at 6-8 College Green, Dublin 2, Ireland.