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November 12, 2013

Fed's Liquidity Plan Could Spur Collateral Shortfall

Top Federal Reserve Board officials are cautiously eyeing the possibility that a new liquidity proposal may incite a collateral shortfall just as the central bank starts to unwind its easy-money policies.

It is not a near-term problem as the central bank continues to push off changing course on its $85 billion monthly bond buying program, but Fed officials are weighing the negative ramifications of forcing banks to meet a slew of new regulatory rules and how such requirements will interact with its monetary policy decision-making in the future.

Specifically, Fed officials are worried about possible unintended consequences that may result when the central bank begins to unwind its balance sheet, ultimately causing the $2.4 trillion held in reserves to shrink back to its precrisis levels. That could potentially spark a shortfall of high-quality assets available to U.S. institutions to meet a proposed liquidity requirement that goes into effect in 2015.”


Read full American Banker article here

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