Federal Budget

US bank shares fall after Treasury debt issuance, proposed new capital requirements

US bank shares fall after Treasury debt issuance, proposed new capital requirements

Business

Some analysts have warned that this flood of new bills could drain bank reserves

NEW YORK (Reuters) – Shares of US banks fell on Monday with some investors pointing to worries that a flood of Treasury bill issuance following the raising of the debt ceiling would drain liquidity from lenders.

The US government is expected to issue $1 trillion or more of short-term debt to replenish its Treasury General Account (TGA) or cash reserves that were depleted during the political haggling over the debt ceiling.

Some analysts have warned that this flood of new bills could drain bank reserves at time when liquidity is needed to bolster their balance sheet given the recent shocks to the financial system from the regional banking crisis.

Most big bank stocks were trading lower in afternoon trading with the S&P 500 banking index down nearly 1 per cent on Monday. JPMorgan Chase & Co, Wells Fargo & Co, Goldman Sachs Group Inc, Morgan Stanley, Citigroup and Bank of America Corp dropped between 0.3pc and 2pc.

"There's a lot concern out there that now that the debt deal has been reached a lot of people are talking about a potential liquidity drain because the Treasury general account has to be replenished," said Jack Janasiewicz, portfolio manager at Natixis Investment Managers, adding that those concerns may be overblown given that money market funds have enough liquidity to absorb huge debt issuance by the Treasury.

US regulators, led by the Federal Reserve, are also expected to propose this month increasing average bank capital requirements by as much as 20pc a person familiar with the matter told Reuters. The Wall Street Journal first reported the story.

The regulations are expected to be a final batch of global bank capital rules laid out by the Basel Committee of banking regulators that are due to take effect at the beginning of 2025, the report said.

Regional bank stocks also logged broad declines on Monday, with the KBW Regional Banking Index shedding 2pc. PacWest Bancorp lost 2.1pc and Western Alliance fell 2.3pc.

The impending international capital rules come amid a broader Fed review of lenders' capital requirements. "It's not shocking that you should expect to see some capital requirements being increased and a little more oversight is expected given what has happened with regional banks," Janasiewicz said.