EDITOR NOTE: Three major governmental agencies just gave banks approval to count US Treasury investments as regulatory capital. On one hand, it is one way to get banks to purchase the very thing that international investors have been turning down at record levels. On the other hand, what’s to happen if a bank undergoes a bank run and depositors want their money back? Though there’s hardly any yield on treasury investments, it does allow banks to “print” more money with fewer actual deposits by issuing more loans to individuals and businesses. It goes without saying that the last thing we need is more money printing. But if a bank does undergo a run, and if treasury market prices happen to sink beforehand, isn’t it a complicated conversion that may require even more government intervention just to get depositor funds back at 100% value? Or will banks be able to “bail-in” depositor funds by activating Dodd-Frank laws that convert depositors into unsecured creditors, offering them bank stock or US Treasuries in exchange for their deposits? Whatever the outcome, it may be wise to convert the portion of wealth you want to protect into non-CUSIP gold and silver and store it away in a private depository. In that way, your funds are safe from bank failures, bail-ins, and the erosion of purchasing power that results from banks issuing new loans (read: new money) generated from Treasuries supported by, strangely enough, newly-printed money.
The Federal Reserve, FDIC and OCC today announced an interim final rule allowing Treasury investments made to community development financial institutions and minority depository institutions under the newly established Emergency Capital Investment program qualify as regulatory capital. Comments are due 60 days after publication in the Federal Register.
Under the program—which was established as part of the December COVID-19 relief bill and which is currently accepting funding applications—Treasury investments may take the form of senior preferred stock or subordinated debt, depending on the type of applicant and other factors. Under today’s IFR, preferred stock issued under the EICP will qualify as additional tier 1 capital, and subordinated debt will qualify as tier 2 capital, the agencies noted.
“Treasury’s Emergency Capital Investment Program helps make capital more available for Community Development Financial Institutions and minority banks. That’s a step in the right direction,” Acting Comptroller of the Currency Blake Paulson said in a statement. “Making clear that these funds qualify as regulatory capital helps make the most of the program so institutions can maximize its benefits.”
The OCC also issued a pledge to strengthen minority depository institutions through its participation in “Project REACh,” which brings together leaders from the banking industry, national civil rights organizations, business, and technology to reduce specific barriers that prevent full, equal, and fair participation in the nation’s economy. “The pledge helps minority banks remain vibrant parts of the economic landscape through larger banks’ commitments to additional investment, technical assistance, executive development, and business partnerships,” Paulson added. “Twenty-one banks have already taken the pledge, and we are eager to see others join.”
Originally posted on ABA Banking Journel