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Why Mnuchin's US bank insurance left markets confused




"The problem with his comments [is] he is either incredibly unknown, or he knows a problem no one else knows," said Dennis Kelleher, chief executive of finance reform Better Markets.

Mnuchin's comments raised a new anxiety: Should people be concerned about the sound of American banks?

Public evidence suggests that banks are not in crisis.

The Federal Reserve conducts annual stress tests on how the major banks will stay under various hypothetical scenarios, such as whether unemployment is falling or housing prices are falling.

In a June report, the Fed concluded that US banks are in good standing and strong enough to withstand the next economic downturn. And regulations adopted after the 2008 financial crisis mean that banks maintain certain levels of liquidity, which can easily be converted into cash to pay off obligations in a crisis.
Mnuchin's remarks on Sunday that banks have "ample liquidity" were faced with confusion and surprise, triggering a trading day just before the Christmas holidays. Dow and S & P 500 each fell by almost 3% ̵[ads1]1; their biggest Christmas Eve declines in history.
Mnuchin said in an unusual statement that he had called CEOs of JPMorgan Chase (JPM), Wells Fargo (WFC) Bank of America (BAC), Citi (C), Goldman Sachs (GS) and Morgan Stanley (MS) in the weekend. According to the Treasury Secretary, they all confirmed that their banks have sufficient liquidity to lend to consumers, businesses and other market operations.
Bank shares took a blow this year. Although the quarterly surplus increased, JPMorgan's share fell by about 15% in 2018, while Goldman Sachs, which is highly exposed to capital markets and struggling with fallout from the global 1MDB scandal, has fallen nearly 39%.

Kelleher said that striking performance is linked to wider fears of the state of the economy. President Donald Trump's trade wars and the shrinking gap between short-term and long-term bond yields have caused some to worry about the pace of economic growth in 2019 and beyond.

If the economy stumbles and businesses borrow less, it hurts the banks' profits. And if it's ultimately a recession, some customers won't be able to repay loans, making the situation worse.

But stock prices and liquidity are different. Liquidity and capital, which banks need as a cushion to absorb losses, have not been prominent concerns. This is because regulators have been going for a long time since 2008 to ensure that the banks will be in good condition in the event of another decline.

Since the financial crisis, cash in the banking system has increased by more than $ 3 trillion, according to a November report from the Federal Reserve Board of Governors.

"Large banks have particularly significant amounts of cash, far exceeding the crisis level and far beyond regulatory requirements," the report said.

The Federal Reserve, following its assessment in June, reported that 35 major financial institutions, including Bank of America, JPMorgan and Citi, had maintained capital levels above the minimum required by the Fed for the third consecutive year.

Liquidity and capital levels could be a problem for some banks down the line, because the Trump administration is considering the recall or revision of some provisions.

But these changes would not affect the six financial institutions that Mnuchin spoke to on Sunday. The Fed's proposal will ease the liquidity requirements of SMEs.

There are "legitimate concerns about the development of liquidity and capital in the banking sector," Kelleher said. "But I just don't think it's part of what we see in the markets today."

He continued: "Secretary Mnuchin commented on it honestly blindsided everyone."

CNN's Donna Borak contributed to this report.



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