Saturday, June 11, 2016

Banks Are Transferring Regulatory Risk to 3rd Parties & Debt Growth Rate Hits 10-Yr Low Due To Government Spending

The Office of Financial Research published a brief titled More Transparency Needed For Bank Capital Relief Trades.  The brief suggests that banks are meeting regulatory capital rules by transferring credit risk to third parties. The paper uses data collected from 18 banks that purchased $38 billion in credit protection. The authors also attempt to estimate the impact of these third party transactions on a banks’ risk-based capital ratios. While this may represent a hole in regulatory policy, its impact is negligible due to the level of capitalization/liquidity in the market.

Source: Federal Reserve, Z.1 Release
The Federal Reserve published a statistical release update for Z.1: Financial Accounts of the United States Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts. As shown to your right, it provides an update on household net worth and non-financial debt at the business, state, and federal level. On an annual basis, the statistic hasn't been lower than 3% for at least the past 10 years, however, Q1 of 2015 showed total growth in debt as 2.8% due primarily to a large drop in federal government spending, which is partially offset by the large increase in the growth of debt at the state and local government level.
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