“The next crisis may arise not from a rash of sick banks but rather a shortage of medicine.
“The onslaught of new federal regulations, including everything from Basel capital and liquidity rules to Dodd-Frank Act margin requirements for swaps traders, is helping drive banks’ demand for Treasury bonds and other safe collateral. While government debt is now plentiful, some worry demand could someday exceed supply, making such assets costlier and leading to private-sector alternatives reminiscent of the securitization boom.
“‘Historically, when there are not enough government bonds as collateral, the private sector creates ‘safe debt.’ In the last 30 years this has taken the form of AAA’-rated asset-backed securities, said Gary Gorton, a professor at the Yale School of Management. ‘Bank regulators ought to focus on overseeing the production of private collateral … [to] try to ensure that it is safe.’
“To comply with higher capital requirements, banks can opt to reduce risk on the asset side of their balance sheet instead of just raising equity. That makes government securities appealing, and having less-risky assets is also essential for implementing liquidity rules.”
Read full American Banker article here