Blackrock CEO Fears New Bank Rules Will Speed Treasury Selloff

The head of the $4 trillion money manager sees another reason to worry about a sudden interest rate spike.
By Dan Freed ,

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

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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