Regulatory Changes Strengthen Bank Credit Quality

The Federal Reserve made news last week by proposing new liquidity requirements for large U.S. banks.  Tougher than the international liquidity requirements proposed by Basel III regulations, these measures are being adopted to ensure a strong and stable financial system in times of market stress.  “Since financial crises usually begin with a liquidity squeeze that further weakens the capital position of vulnerable firms, it is essential that we adopt liquidity regulations to complement the stronger capital requirements, stress testing and other enhancements to the regulatory system,” Fed governor Daniel Tarullo said.  These requirements are a positive for bank bondholders, as they improve the overall risk profile of banks and makes them more creditworthy institutions.  Our overweight position to banks is based on the higher yields available in the sector and on the premise of improving fundamentals, something that we are happy to see play out.