Market and regulatory decisions spur bond bonanza

Record-breaking Wall Street bank bond offerings in recent days are being driven by a combination of extraordinary market conditions and regulatory decisions that can be traced to the government’s pandemic relief efforts, said analysts.

JPMorgan Chase, Bank of America, Goldman Sachs and Morgan Stanley have or are planning to issue altogether $40bn in debt, according to news reports. JPMorgan’s $13bn April 15 bond sale was briefly an industry record until it was topped the next day by Bank of America’s $15bn offering.

While the banks did not provide details on why they are raising the debt, analysts said a confluence of monetary and regulatory factors are driving the unprecedented cash grab, underscoring the increasingly tricky balancing act for Wall Street lenders as the economy emerges from the pandemic slump.

That economic rebound driven by the vaccination rollout and trillions of dollars of stimulus, combined with ultra-low interest rates, has made for excellent borrowing conditions on the heels of stellar first-quarter earnings.

After the US Federal Reserve said in March that it would lift capital distribution curbs on banks that pass its June stress tests, many also want to have enough cash on hand to keep shareholders happy with increased stock buy backs.

“We are going to buy back a substantial amount ... as soon as we can,” Bank of America CEO Brian Moynihan told analysts during the bank’s earnings call before the bond sale.

But it’s not all good news. While the fire-hose of government stimulus gushing through the economy flattered bank earnings, it has also reduced loan growth and caused deposits to surge. Banks in turn have had to park those deposits with the Federal Reserve and in safe-haven assets such as US treasuries.

“These deposits are growing like crazy, but loans are not and common equity is not, and that creates a serious problem for the banks,” said Odeon Capital Group analyst Dick Bove. “I’ve never seen this happen before.”

For some banks, those problems are regulatory. On April 1, banks had to resume holding extra capital against treasuries and Fed deposits after the central bank ended temporary pandemic relief that had allowed lenders to exclude those assets from a key capital calculation.

That “supplementary leverage ratio” (SLR) is an extra safeguard introduced after the decade-ago financial crisis that requires big banks to hold cash against assets regardless of their risk. With surging deposits, some banks may be looking to raise debt to ensure they operate comfortably within the ratio.

“It’s quite likely that the debt issuance may have been partly driven by the expiration of the SLR relief,” said Gennadiy Goldberg, senior rates strategist with TD Securities.

Bank of America executives said on its first quarter earnings call before the bond sale that it still had room before it hit its leverage ratio threshold. The bond sale was primarily aimed at the bank’s business growth, including share repurchases and resolution planning, said a person familiar with the matter.

Morgan Stanley’s debt offering was not driven by regulatory constraints, according to a person familiar with the matter. A spokesperson man for Goldman Sachs did not respond to a request for comment. The Fed declined to comment.

JPMorgan, for its part, issued the bonds in part to address regulatory constraints, according to an informed source. The bank’s executives said deposit growth increased its leverage, prompting CFO Jennifer Piepszak to criticise the rules.