In the Market: Bid to end bank 'window dressing' may reshape US repo market

investing.com:

By Paritosh Bansal

(Reuters) — A proposal by global regulators to change how the largest banks report key risk metrics at the end of the year could deal a blow to their U.S. short-term funding businesses, the latest salvo in a battle over tighter capital rules.

The largest global banks are required to hold more capital than others, with a surcharge calculated every year from Dec. 31 values of a set of risk measures. In a bid to reduce the capital hit, which hurts profitability, some banks adjust businesses at year-end to lower those numbers, a tactic called window dressing.

JPMorgan Chase (NYSE:JPM) and Bank of America, for example, reported lower risk measures at the end of last year than they were earlier in 2023, avoiding what would have been an additional surcharge of more than $8 billion each, according to Reuters calculations of risk metric scores.

Last week, the Basel Committee on Banking Supervision, a global watchdog, cracked down on window dressing. It proposed that banks use the average of values over the reporting year for most of these risk metrics, rather than the year-end snapshots. In making the proposal, the committee joined the U.S. Federal Reserve, which proposed a similar move a few months ago.

While window dressing is a well-known phenomenon, the mechanics of the practice are complex, with multiple factors affecting banks' decisions. A closer examination of how JPMorgan and Bank of America lowered one of the risk measures provides fresh insights about some of the factors at play and the potential impact of the proposed change.

In this example, the measure is affected in part by the banks' activity in the repurchase agreements, or repo, market, in which investors borrow against Treasuries and other