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US Banking Stocks Tumble Amidst Treasury Debt Issuance and Anticipated Capital Requirement Hikes

A surge in Treasury bill issuance and looming regulatory proposals for increased bank capital requirements have caused US bank shares to stumble.

The New York Stock Exchange
The New York Stock Exchange

Treasury Debt Issuance Triggers Bank Shares Decline

The value of US bank shares witnessed a slump on Monday, partly due to concerns regarding the likely liquidity drain resulting from the imminent wave of Treasury bill issuance consequent to the lifting of the US debt ceiling. The US government is projected to issue over $1 trillion in short-term debt to restore the Treasury General Account (TGA) or cash reserves, which suffered from the prolonged political negotiations over the debt ceiling.

Financial Analysts Express Concern over Banks' Liquidity

Financial experts have raised the alarm about this influx of new bills, warning that it could diminish bank reserves just when they require additional liquidity. This necessity for financial bolstering arises from the recent shocks to the banking system from the regional banking crisis. In Monday's afternoon trading, major bank stocks like JPMorgan Chase & Co, Wells Fargo & Co, Goldman Sachs Group Inc, Morgan Stanley, Citigroup, and Bank of America Corp declined from 0.3% to 2%.

The Implication of the Debt Deal on Banks' Liquidity

Natixis Investment Managers' portfolio manager, Jack Janasiewicz, expressed concerns over the potential liquidity drain due to the Treasury's need to replenish its general account following the debt deal. However, he also noted that these fears might be overstated as money market funds possess ample liquidity to absorb significant debt issuance by the Treasury.

Potential Increase in Bank Capital Requirements

This month, US regulators, headed by the Federal Reserve, are anticipated to propose an increase in the average bank capital requirements by up to 20%, as The Wall Street Journal first reported. These regulations are believed to be the final set of international bank capital rules proposed by the Basel Committee of banking regulators, slated to be implemented by the start of 2025.

Regional Bank Stocks Face Decline

Monday also marked a noticeable decline in regional bank stocks, with the KBW Regional Banking Index down by 2%. Stocks of PacWest Bancorp, Western Alliance, and Comerica Inc also recorded losses. This impending international capital rule is part of a wider Fed examination of lenders' capital requirements, Janasiewicz added, suggesting that an increase in capital requirements and further regulatory oversight are expected.