Monday Musings: March 15, 2021

Mar 15, 2021


Public Trust Credit Team

The curious case of the first percentile’s negative Tri-Party General Collateral Rate

If this paragraph’s bold title wasn’t enough to capture readers’ attention, then this explanation will surely do it; the New York Federal Reserve Bank reported that the first percentile of the range of Tri-Party General Collateral Rate (TGCR) showed a negative 1 basis point on Friday, March 12. This is alarming for two reasons; the first is that any repo is being reported in the negative range, and the second is the extreme difficulty of trading tri-party repo below zero. Apparently, the BNY Mellon cannot clear trades that are negative, and BNY is the clearinghouse for 80% of tri-party repo transactions (per the SEC). Because of this, the Credit Team believes that there is not any risk of contagion in the market. Knowledgeable sources suggested that money market funds are the primary lenders in tri-party repo, and those funds have the option of using the Fed’s overnight reverse repo that is not likely to go below 5 basis points. In short, this appears to have been a temporary phenomenon that is indicative of the data collection methodology or sources rather than a systemic risk.

U.S. banks anticipated to dial back cash stockpiles set aside for loan losses

This morning, The Journal reported that U.S. banks may see an uptick in profitability this year as anticipated loan losses due to the COVID-19 downturn are not expected to materialize as initially suspected. In the wake of the pandemic, U.S. banks maintained a conservative view regarding the downturn, setting aside billions of dollars in reserves to cover loans initially expected to underperform or default. According to The Journal, data from the Federal Deposit Insurance Corp. shows that U.S. banks had $236.6 billion in total reserves in December, approximately twice the pre-pandemic level. However, the economy has primarily performed better than expected, outperforming internal forecasts at some central banking institutions in the U.S. Between the acceleration of vaccinations across the country and the recently signed $1.9 trillion stimulus package, it appears the worst of the economic fallout from COVID-19 is more-or-less behind the country. Given the positive data, U.S. banks are cautiously optimistic with market participants expecting some institutions to reduce the massive stockpile of cash reserves set aside for loan losses. The reversal would flow through to the bank’s profitability during the year in which they are reversed, but this would be a transitory relief as revenue is largely anticipated to decline at the four largest U.S. banks this year given the reduced lending and market activity during the pandemic. Early on, most executives were relatively pessimistic given the uncertainty surrounding COVID-19. While prudent, it appears improving economic data, upward forecast revisions for GDP and unemployment, and positive vaccination data have provided U.S. banks with an optimistic outlook for 2021.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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