USA Today

Government research warns of quarterly dumping by foreign banks

NEW YORK — A government research paper says foreign-owned broker-dealers are dumping an average of $170 billion in certain U.S. assets before the end of each quarter in order to appear safer and less levered.

The practice, driven by an effort to comply with overseas regulatory requirements, could hurt U.S. money market funds, as well as bond investors, according to the report by the Office of Financial Research (OFR), a unit of the Treasury Department.

The report, written for OFR by Benjamin Munyan of Vanderbilt University, is based on confidential regulatory data from the OFR and the Federal Reserve.

The paper concludes that broker-dealers with foreign parent companies are collectively dumping certain short-term borrowings by an average of $170 billion at the end of each quarter to better meet capital requirements, which are measured at the end of each quarter.

The report calls this practice “window-dressing,” and says no such practice was found by U.S. banks because U.S. banking regulators use a quarter-average measure of leverage ratios.

But the dumping — of an asset known as re purchase agreements, or repos — could affect U.S. money market funds and Treasury investors, the paper warned.

Repo agreements are a form of borrowing — usually overnight — that are a major source of liquidity for money-markets funds and institutional investors.

JPMorgan CEO Jamie Dimon and former Treasury Secretary Larry Summers have both warned of a liquidity problem that some experts have said could be linked to declines in repo funding.

The OFR paper said the selling by foreign banks could affect prices for U.S. Treasuries and other government bonds, which are a major form of collateral in the repo market.

The quarterly selling may also leave money market mutual funds with excess cash they cannot invest.

Despite being able to anticipate quarterly window dressing, money market fund manager were unable to find any investment for about $20 billion of cash each quarter-end before September 2013, the paper said.

The Federal Reserve’s reverse repurchase agreement program began at that time as a substitute investment for repo lenders during times of window dressing.