How Ben Will Free The Banks – US-FOREX.US
Federal Reserve Chairman Ben Bernanke has tended to the largest banks in the U.S. the way a park ranger deals with an endangered species. He caught them, took them in and nursed them back to health. Now he has to release them back into the wild. He’s hoping for an easy transition.There are more than a dozen different programs established by the Fed and Treasury Department to confront the crisis in the banking industry, and there is no one way the government plans on working out of them. Yet, the government isn’t interested in making abrupt movements, which would disrupt the still fragile sector. For example, the Fed and the Treasury have made banks less willing to use the Temporary Liquidity Guarantee Program by indicating that firms will be more highly regarded if they issue debt that isn’t guaranteed through the program. The method appears to be working. Though the program is still in effect, there has been a greater hesitancy to use it.Banks like Citigroup
, Wells Fargo
and Bank of America
flocked to these programs during the financial crisis, even though some claimed at the time that it wasn’t entirely necessary – now the banks are being weaned off. Brokerage firms such as Goldman Sachs
and Morgan Stanley
went so far as to change their status to a “bank-holding company” to ensure their eligibility. General Electric
‘s financial arm GE Capital was granted exemption, and actually became the largest recipient of the TLGP program, though was not given additional oversight. When the Fed does finally release the banks, investors should focus on credit quality first and then earnings. Most of the Fed’s actions have been credit-centric, after all. Banks with the most credit risk on their balance sheets will have the most difficult time adjusting as the Fed returns to normalcy.Bernanke’s semi-annual monetary policy report to Congress was atypical. The minutes from the June Federal Open Market Committee meeting were released beforehand, and the chairman beat committee members to a discussion on an “exit strategy” as well by publishing an op-ed on the matter in the Wall Street Journal.
Bernanke stressed that the central bank’s extraordinary measures will remain in place for the foreseeable future. Though, when the time comes, the exit strategy will focus on the Fed’s balance sheet, which has grown to massive proportions. The primary tool used be interest on reserves. Bernanke also mentioned a number of measures to reduce the level of reserve balances, including draining reserves through reverse repos. The Fed could also offer term deposits on banks, said Mike Feroli, a senior economist at JPMorgan Chase, which would function like certificates of deposits do for retail savers.Bernanke avoided discussion of the federal-funds rate, as well as whether the Fed would extend its Treasury purchase program when the 300 billion of purchases is completed in September. Joe LaVorgna, chief U.S. economist at Deutsche Bank, believes the Fed will not raise the federal funds rate until unemployment begins to substantially decrease, adding that before that happens, the balance sheet will be in “runoff mode”.