🎙️ Piggy Bank

At a barbecue last weekend, someone mentioned having “Amazon addiction.” And some of my neighbors get a couple of packages a day, sometimes more 📦 

That’s what happens when about half of Americans are Amazon Prime members, you can buy virtually anything from your couch, and you’re only a couple of clicks away from spending your entire paycheck on Crocs, AirPods, and 47 other household items you may or may not need.

Today’s Chart of the Day shows the steady rise of Amazon Prime nationwide.

— Matthew

Here’s the rundown:

Today, we'll discuss three of the biggest stories in markets:

• New regulations for big banks

• How will the government refill its piggy bank?

• What recent oil production cuts mean

All this, and more, in just 5 minutes to read.

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CHART OF THE DAY

IN THE NEWS

🏦 Big Banks Could Face 20% Boost to Capital Requirements (WSJ)

U.S. regulators could force large banks to shore up their financial footing after the midsize bank failures shocked the financial system earlier this year.

• Regulators may propose the changes this month. In doing so, they'd raise overall capital requirements by about 20% on larger banks on average, The Wall Street Journal reported. Capital requirements are regulatory standards for banks determining how much liquid capital (easily sold assets) to keep relative to their overall holdings. In other words, it’s a buffer banks must hold to absorb potential losses.

• That precise amount would depend on a firm's business activities. The biggest increases are expected for U.S. megabanks with big trading businesses, including Goldman Sachs, Morgan Stanley, and Bank of America.

Michael Barr, vice chair for supervision at the Fed, had been pushing for tighter banking regulations before the collapse of Silicon Valley Bank (SVB) and has continued to do so.

“My review of Silicon Valley Bank’s failure demonstrates that there are weaknesses in regulation and supervision that must be addressed, and I am committed to doing so,” Barr told a Senate Committee on banking in May.

Why it matters:

Some banks relying heavily on fee income (think investment banking or wealth management) could also face large capital increases.

• It's likely the first of many steps to amp up rules for Wall Street.
  

• The industry says more stringent requirements aren't needed and would force banks to merge to stay competitive. They also claim the requirements would make it harder for Americans to get bank loans. A relatively large jump in capital requirements could raise consumer costs, too, and lead banks to stop offering certain services.

Tougher rules were en route for large lenders even before the failures of Silicon Valley Bank, Signature, Silvergate, and First Republic this year. But since then, regulators have said they plan to apply new rules to a wider range of banks, potentially including those with at least $100 billion in assets.

Timeline-wise, the Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency are expected to propose and seek comment on the capital rules. They’d have to vote again to complete the changes and would likely implement them over the coming years.

Supporters of the change say it would have forced SVB to address issues earlier as interest rates began rising and the value of its holdings declined.

🤑 The Government Refills Its Piggy Bank (Axios)

With the debt ceiling standoff behind us, the Treasury must begin refilling its bank account. And yes, the U.S. Treasury does have a “checking account” to facilitate federal spending, but it’s not like yours or mine: It’s at the Federal Reserve.

• Known as the Treasury General Account (TGA), its cash balance typically fluctuates from hundreds of billions to even trillions during the pandemic as government spending surged.
  

• But that balance fell under $50 billion recently, hence concerns the government would run out of cash and default if the debt ceiling wasn’t raised.

As the Treasury Department hurries to raise capital and restore the government’s financial operating buffer, a more technical challenge emerges: How well can the market for Treasury bonds (aka T-bills) absorb what will likely amount to over $1 trillion—about 3.8% of GDP—worth of debt issuance over the next six months?

• Like any market, a flood of new supply can be disruptive, though the Treasury market is particularly robust as the largest financial market in the world.
  

• TD Securities’ senior interest rate strategist added, “Outside of a major crisis, like 2008 or 2020, this is going to be the largest issuance of T-bills on record.”

Why it matters:

Replenishing the TGA will weigh on bond prices, potentially pushing interest rates higher (bond prices & rates have an inverse relationship)with the Fed already in a “wait and see” mode, hoping to discern how higher rates are impacting the economy.

Another dynamic at play is what economists call “crowding out.” As the government spent down the TGA, it injected more money into the economy while refilling it pulls out money.

• Said differently, as money flows into purchasing Treasury bonds, less liquidity will be available elsewhere in the financial system for things like lending money to businesses, buying stocks, or flowing into banks as deposits.
  

• Bank of America estimates that the T-bill onslaught and liquidity drain will equal another 0.25% interest rate hike.

Whether this liquidity blow is a big issue is up for debate. With over $2 trillion sitting in the Fed’s overnight repo and reverses repo facility, primarily held by money market funds, funds may shift without much consequence for the real economy.

• If those funds rotated into buying T-bills, the effect would be more neutral, says Deutsche Bank’s George Saravelos. But if bank deposits are withdrawn to buy Treasuries, there could be more strain on banks.
  

Just a few months since Silicon Valley Bank first collapsed (here’s our podcast explaining that crisis), the banking system remains fragile, and higher interest rates and less money floating around only exacerbates the challenges regional banks face.

🛢️ Saudi Arabia to Cut Oil Production (NYT)

OPEC Plus, a group of major oil-producing countries, has agreed to make a complicated, major move: It’s cutting production to halt the recent slide in oil prices. Saudi Arabia, in particular, could cut its output by an additional one million barrels a day.

• The Saudi cut would be for one month, beginning in July, but could extend to "support the stability and balance of oil markets."

All told, OPEC+ has now dropped production on paper by 4.6 million barrels a day. But some countries can’t produce their quotas, so the actual reduction is around 3.5 million barrels per day, or over 3% of global supply. Global oil production ranges around 100 million barrels a day.

Calling the reduction a “lollipop,” Saudi Arabia’s Energy Minister said, “We wanted to ice the cake.”

• The country's Ministry of Energy said Saudi Arabia will now produce 9 million barrels of crude oil daily. That's 1.5 million fewer barrels per day than it was churning out earlier this year.

• The cuts come shortly after Memorial Day in the U.S., ahead of the busy summer travel season. In response to the cuts since last year, the Biden administration has released millions of barrels of oil from the Strategic Petroleum Reserve to keep gas prices down.

Why it matters:

U.S. crude has recently dipped below $70 and has fallen drastically since last summer. The new cut would likely push up oil prices in the short term, but the impact after that would depend on whether Saudi Arabia decides to extend it.

• The OPEC+ group, including Russia and its allies, was pressured to produce a deal to reverse the pessimism that has dominated the oil market in recent weeks. Despite two substantial output cuts since October, the price of oil has drifted about 15% lower over the past seven months.

• The agreement is the result of lengthy negotiations on Saturday and Sunday. It reworks the output quotas of several countries, with the United Arab Emirates gaining and some others losing production levels.

• “This is definitely not a clean and simple deal,” one head of geopolitics said.

The agreement includes a voluntary cut of 500,000 barrels a day that Moscow announced in February.

• After the meeting, comments at the news conference revealed skepticism that Russia was abiding by those lower production levels. High Russian production levels, and its increased share of Asian markets, including India, often at the expense of Middle East oil producers, have become a sensitive issue.

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