U.S. GSIBs recently issued a torrent of debt, with record breaking issuance sizes from JPM and then BAC. Yet, at the same time we know that the banking system has too much liquidity, and that banks are pushing out poor quality deposits to money market funds, who ultimately pour the excess liquidity down the ON RRP drain. The two behaviors can be reconciled by understanding the very strong regulatory incentives put on GSIBs to issue longer term liabilities. In response to the Financial Crisis, regulators devised a set of complementary regulations (Basel III) aimed at preventing future bank runs by setting limits on the size and composition of their balance sheets. Unsecured long term debt is favorably treated under all those constraints, and is especially compelling at near record low yields. We have already discussed how the Liquidity Coverage Ratio encourages longer term debt issuance. In this post we review the what and why of a few more Basel III constraints: the Net Stable Funding Ratio, GSIB Short-Term Wholesale Funding Indicator, and Total Loss Absorbing Capacity.
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