Wall Street bankers, from senior executives to traders, are complaining that the Federal Reserve is refusing to engage in scenario planning for a US downgrade or default.
With days until the Treasury’s August 2 deadline to raise the debt ceiling, bankers say they are not getting a response to efforts to discuss the market impact of a failure to reach a deal in Washington or if credit ratings agencies cut the US triple A rating.
Banks are concerned about a wide range of operational issues as well as the broader question of how the Fed would support the financial system if there were disruption caused by a failure to raise the debt ceiling.
For example, they would like to know whether the Fed would be willing to lend against Treasuries with a defaulted interest payment, which would support the repo market. At a broader level, they would like to know whether the Fed will support the refinancing of Treasury securities by stepping in and buying any unsold stock at auctions.
In terms of the overall financial system, banks want to know what support the Fed would offer if there were a run on money market funds – knowing the Fed will provide them liquidity would reduce the chance of such a run.
They also want to know how the Fed would handle their capital and liquidity regulation if, for example, Treasuries fell in value or they experienced large inflows or outflows of deposits and how principal and interest payments would be made.