BIS Confirms Banks Use "Lehman-Style Trick" To Disguise Debt, Engage In "Window Dressing"

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)."

But why repo? Because, as a form of collateralised borrowing, repos allow banks to obtain short-term funding against some of their assets – a balance sheet-expanding operation. The cash received can then be onlent via reverse repos, and the corresponding collateral may be used for further borrowing. At quarter-ends, banks can reverse the increase in their balance sheet by closing part of their reverse repo contracts and using the cash thus obtained to repay repos. This compression raises their reported leverage ratio, massaging their assets lower, and boosting leverage ratios, allowing banks to report them as being in line with regulatory requirements.

So what did the BIS finally find?  Here is the condemning punchline which was obvious to most back in 2014:

"The data indicate that window-dressing in repo markets is material"

The report continues:

Data from U.S. money market mutual funds point to pronounced cyclical patterns in banks’ U.S. dollar repo borrowing, especially for jurisdictions with leverage ratio reporting based on quarter-end figures (Graph III.A, left-hand panel). Since early 2015, with the beginning of Basel III leverage ratio disclosure, the amplitude of swings in euro area banks’ repo volumes has been rising – with total contractions by major banks up from about $35 billion to more than $145 billion at year-ends. Banks' temporary withdrawal from repo markets is also apparent from MMMFs’ increased quarter-end presence in the Federal Reserve’s reverse repo (RRP) operations, which allows them to place excess cash (right-hand panel, black line).

This is problematic because this central-bank endorsed mechanism "reduces the prudential usefulness of the leverage ratio, which may end up being met only four times a year." Furthermore, the BIS alleged that in addition to its negative effects on financial stability, the use of repos to game the requirement hinders access to the market for those who need it at quarter end and obstructs monetary policy implementation.

In other words, to help banks appear healthier than they are for regulatory purposes, central banks are essentially diluting the impact of their own monetary policy.

This is hardly a new development, and as we explained in 2014, one particular bank was notorious for its use of similar sleight of hand: as Bloomberg writes, the use of repo borrowings is similar to a "Lehman-style trick" in which the doomed bank used repos to disguise its borrowings "before it imploded in 2008 in the biggest-ever U.S. bankruptcy."

The collapse prompted regulators to close an accounting loophole the firm had wriggled through to mask its debts and to introduce a leverage ratio globally.

How ironic, then, that it is central banks' own financial operations with bank counterparties, that make a mockery of any macroprudential regulation attempts by central banks, and effectively exacerbate the problems in the financial system by implicitly allowing banks to continue masking the true extent of their debt.


Froman Wild Bill Steamcock Mon, 06/25/2018 - 10:04 Permalink

Break up the mega sized banks.   Re institute Glass-Steagall and get the insurers out of the banking business.  Additionally, have loan officers that  actually understand credit risk as opposed to them being what they are now "relationship managers"/sales people.  Get rid of loan approval by committee.  The committees are made up of people that do not have the first clue about credit risk.  End the practice of putting all of the credit risk people on the second line of defense or on the special assets committee after the carnage has happened serving as the janitorial crew and stop relying 100% on scenario "modeling"  99% of the models are based on at least one, if not more, bull shit assumption.  As my finance professor that used to make us memorize all of the formulas and use the tables in the back of the finance book used to tell us to loud audible groans from the class, "a calculator, a spreadsheet, nor a computer will not produce the correct answer if you do not know the formulas forwards and backwards and how to calculate them by hand to ensure your input is correct....garbage in and garbage out"  I have seen this played out in real life too many times at the bank especially since the institution was relying on off-shore and subcontractors to produce the calculations in the models. The bank that I work at is running things on almost 400 individual models and bragging about it.  I can say without hesitation that there is bad data and or multiple incorrect calculations in all 400 of those models.  The banking system is broken and until the all of the crap that is in the system washes through it is going to stay broken.  

In reply to by Wild Bill Steamcock

Son of Captain Nemo Sun, 06/24/2018 - 14:53 Permalink

BIS would "NEVER" get caught up in that level of fraud given their reputation to Europe and the rest of the World!...

Bwa ha ha ha ha ha ha ha ha!!!! /s


Since his release from an American prison and "found not guilty" for PM rigging I think this guy (…) could be invaluable to BIS with a very bright future ahead him working for them!...

On top of that he's Swiss with an America "visa"!...


Cycle Sun, 06/24/2018 - 14:55 Permalink

Of course, since the BIS is not populated by idiots, making the rule that the leverage ratio threshold is calculated 4 times a year rather than as a running average of a year suggests the BIS is complicit in this fraud and at this juncture is merely covering its collective a$$.

Sudden Debt Sun, 06/24/2018 - 15:17 Permalink

Now they're going after the banks just to sabotage Trump.

talking about the hand that feeds you... for decades the left was in bed with the banks and now they're willing to sacrifice it to show their hate against humanity

BankSurfyMan Sun, 06/24/2018 - 15:18 Permalink

Swapping repos? Fun stuff! Wipe out the near twenty two trillion in U.S. debt and start over. Within a week it will be reported that there is another 200 trillion that was hidden due to window dressings! Economic collapse is fun stuff, pass the blue cheese dressing! Thanks!

adonisdemilo Sun, 06/24/2018 - 15:28 Permalink

If it's "material" it's important, and if it relates to questionable practices then it's unethical if not illegal.

So why not start by firing the actors, give them immunity from prosecution IF they spill the beans about the main players.


truthalwayswinsout Sun, 06/24/2018 - 16:15 Permalink

The guy who robs a 7-11 goes to jail for 20 years.

The banksters who rob the system get bonuses or if they are caught pay billion dollar fines.

And if you are an FBI agent you get to depose the government or simply get fired if you are caught.

ElTerco Sun, 06/24/2018 - 18:26 Permalink

The game is rigged, on purpose. The Central Banks already knew this, and put the mechanism in place so they could have a CYA excuse to look the other way, it the interest of "financial stability". It's all a giant scam.

numapepi Mon, 06/25/2018 - 11:31 Permalink

How is it possible for a company that literally prints money to be constantly in the arms of bankruptcy? Either executives are drooling imbeciles or they are thieves of the highest order.