NEW YORK ( TheStreet) -- The long-anticipated selloff in U.S. Treasury bonds hasn't been that disruptive to markets -- yet. But that could change as banks move to comply with proposed new capital rules announced by U.S. regulators Tuesday, according to BlackRock (BLK - Get Report) Chairman and CEO Larry Fink.
Fink told Bloomberg TV banks had been incentivized to hold U.S. Treasuries because Basel 3 capital rules they had been working to meet didn't penalize them for having high leverage ratios as long as the debt they held was in government securities.
"Under Basel 3, institutions can have very leveraged balance sheets and still conform to capital rules," said the head of the world's largest money manager, which oversees nearly $4 trillion in assets.
To conform with Tuesday's rules, however, which were proposed by the U.S. bank regulators, big banks like JPMorgan Chase (JPM - Get Report), Citigroup (C - Get Report), Wells Fargo (WFC - Get Report) and Bank of America (BAC - Get Report) will either have to raise more equity, sell U.S. Treasury and mortgage-backed securities (MBS), or retain more of their earnings, cutting back on planned dividends and share repurchases, Fink said."If they shrink their balance sheets we're going to have a more aggravated problem in the future because banks are the largest owners of U.S. Treasuries," Fink said. He added that sales by banks coming at the same time the Fed is cutting back on its historic $85 billion per month in Treasury and MBS purchases could lead to an "imbalance," as interest rates move higher. "It's destabilizing if interest rates go up high enough fast enough that it impairs the opportunities you have in equities," Fink said. -- Written by Dan Freed in New York. Follow @dan_freed