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The Nudge That Will Force Banks to Put More Money Into Treasury Securities

Economic Policy Journal
July 2, 2013

The Federal Reserve is out with a release today announcing that it:

on Tuesday approved a final rule to help ensure banks maintain strong capital positions that will enable them to continue lending to creditworthy households and businesses even after unforeseen losses and during severe economic downturns[...]

"This framework requires banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb losses, while reducing the incentive for firms to take excessive risks," Chairman Ben Bernanke said. "With these revisions to our capital rules, banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy."

Translation: The rules will require banks to purchase more government securities, rather than make loans to the private sector. The nudge is in.

In a May 1 report,Treasury Borrowing Advisory Committee said banks, over time, will need to buy as much as $5.7 trillion in "safe" assets including government bonds by 2020 to comply with the 2010 Dodd-Frank Act in the U.S., and capital standards set by the Bank for International Settlements in Basel, Switzerlandt.

http://www.economicpolicyjournal.com/2013/07/the-nudge-that-will-force-banks-to-put.html