How A Debt Ceiling Default Would Damage Banks
By Joe Adler and Victoria Finkle
Bankers are growing increasingly fearful that the U.S. could breach the debt ceiling as the prospects for a deal ahead of a looming Oct. 17 deadline appear uncertain. Their concern primarily centers on a key fact: Treasury bonds do more than fund the government; they buttress the financial system. Bankers warn that a default on certain Treasuries could put market collateral at risk, harm overnight lending and drain key sources of liquidity from the market. “All of the consequences of an actual default are just severe and unfathomable and unthinkable,” said Rob Nichols, the president and chief executive officer of the Financial Services Forum. “If we were to default on our debt, that would probably spook investors, which would dry up overnight lending. You would imagine that accompanying that sort of event, we would be downgraded, which probably would lead to a sharp spike in rates, which would have its own drag on the economy.” As banking policy analyst Karen Shaw Petrou describes it, Treasury obligations are the “water” in the financial system’s plumbing. “They’re the global reserve currency and they are perceived to be the most secure thing you can own,” said Petrou, managing partner of Federal Financial Analytics. “That is why it is pledged as collateral. … The very biggest banks fear that a debt ceiling breach breaks the pipes.”