Federal Reserve

Elizabeth Warren pushes Treasury Secretary Mnuchin for answers on overnight lending issues

Key Points
  • Sen. Elizabeth Warren is pressing Treasury Secretary Steven Mnuchin for answers on recent events in the overnight lending, or repo, markets.
  • In a letter, the Democratic presidential candidate says she worries banks will use the issue as an excuse to get financial regulations eased.

Sen. Elizabeth Warren said she is worried that banks may try to use the recent tumult in short-term lending markets as an excuse to get regulations eased on the industry.

In a letter to Treasury Secretary Steven Mnuchin, the Massachusetts Democrat and presidential contender pointed to the mid-September repo market turmoil and the causes that have been cited for the issues, such as a rush of corporate tax payments and government bond auction settlements that drained money from a system that usually functions smoothly.

A cash crunch in the system saw overnight lending rates spike, with the repo rate briefly hitting 10%.

VIDEO1:4401:44
What it means when the Fed conducts a 'repo' operation

Other discussions of the funding issues have centered around banks and whether they are too reluctant to part with cash that would be used in repo, where banks go to get overnight funding.

Warren, a member of the Senate banking committee, said she is "concerned" about that issue and whether Wall Street institutions will try to assert that liquidity regulations imposed after the financial crisis are too strict and interfering with lending market functions.

"These rules were designed to ensure that banks have enough cash on hand to meet their obligations in the event of another market crash," Warren wrote in a letter dated Friday and released Tuesday. "Banks are reporting profits at record, levels, and it would be painfully ironic if unexplained chaos in a small corner of the banking market became an excuse to further loosen rules that protect the economy from these types of risks."

The Treasury did not immediately respond to the Warren letter specifically. A spokesman referenced unspecified remarks last week from Mnuchin on the repo issue.

Treasury Secretary Steven Mnuchin arrives to testify before a House Financial Services Committee hearing on Trump administration efforts to remove Fannie Mae and Freddie Mac from government conservatorship on Capitol Hill in Washington, U.S. October 22, 2019.
Julio Cortez | Rueters

Fed officials have looked at why banks were reluctant to step into the repo markets during the September rate spike.

"They should think about regulations, liquidity cover ratios, Basel 3, all of the rules that have been put on banks to not lend out their cash to make sure that they're very liquid and have high capital," said James Bianco, head of Bianco Research. "That needs to be addressed, that you've overregulated the market."

Warren's letter addressed Mnuchin's role as head of the Financial Stability Oversight Council.

She posed three questions she wants answered by Nov. 1, focusing on the causes of the spike in borrowing rates, why the New York Fed has extended operations to address the funding issues, and what the FSOC will do with data it is collecting on repo transactions.

"I do not question the actions of the New York Fed, but I write to seek clarity on why they were necessary, and the implications of the cause of the spikes," Warren wrote.