Several years ago we showed how the Fed’s then-new Reverse Repo operation had quickly transformed into nothing more than a quarter-end “window dressing” operation for major banks, seeking to make their balance sheets appear healthier and more stable for regulatory purposes.
As we described in article such as “What Just Happened In Today’s “Crazy” And Biggest Ever “Window-Dressing” Reverse Repo?”,Window Dressing On, Window Dressing Off… Amounting To $140 Billion In Two Days”, “Month-End Window Dressing Sends Fed Reverse Repo Usage To $208 Billion: Second Highest Ever“, “WTF Chart Of The Day: “Holy $340 Billion In Quarter-End Window Dressing, Batman“, “Record $189 Billion Injected Into Market From “Window Dressing” Reverse Repo Unwind” and so on, we showed how banks were purposefully making their balance sheets appear better than they really with the aid of short-term Fed facilities for quarter-end regulatory purposes, a trick that gained prominence first nearly a decade ago with the infamous Lehman “Repo 105.”
And this is a snapshot of what the reverse-repo usage looked like back in late 2014:
Today, in its latest Annual Economic Report, some 4 years after our original allegations, the Bank for International Settlements has confirmed that banks may indeed be “disguising” their borrowings “in a way similar to that used by Lehman Brothers” as debt ratios fall within limits imposed by regulators just four times a year, thank to the use of repo arrangements.
For those unfamiliar, the BIS explains that window-dressing refers to the practice of adjusting balance sheets around regular reporting dates, such as year- or quarter-ends and notes that “window-dressing can reflect attempts to optimise a firm’s profit and loss for taxation purposes.”
For banks, however, it may also reflect responses to regulatory requirements, especially if combined with end-period reporting. One example is the Basel III leverage ratio. This ratio is reported based on quarter-end figures in some jurisdictions, but is calculated based on daily averages during the quarter in others. The former case can provide strong incentives to compress exposures around regulatory reporting dates – particularly at year-ends, when incentives are reinforced by other factors (eg taxation).”