Zhitong Finance and Economics noted that at the end of November, interest rates in the U.S. short-term financing market soared for three consecutive days. This has left Wall Street wondering if the financial system is running out of cash.
The surge in repurchase agreements in which investors borrowed against U.S. Treasuries and other collateral could be a sign that cash is becoming increasingly scarce. The market requires minimal liquidity to run smoothly.
Interviews with more than six bank executives and market participants show that the higher level of interest rates on the Treasury GCF Repo Index between Nov. 30 and Dec. 4 can ultimately be explained by factors other than cash shortages, such as month-end bank closes and hedging** transactions.
One of the problems facing the market is that there is no consensus on how much cash in the system is too little, so it is not known when it will break through this level. Estimates vary widely, adding to the unease.
Tell Alessio, treasurer of regional bank Cadence Bank, said that while they have access to ample liquidity, they are watching the threshold at which market operations could be disrupted. "We actively monitor the repo market, looking for leading indicators about the lower bound. ”
Interviews with bank executives also give a sense of the Fed's investigation into senior finance**. Some of these executives asked on condition of anonymity so they could speak freely. Together, these executives work for banks that manage hundreds of billions of dollars in assets.
Two sources at a major U.S. bank said their minimum appropriate reserve level (LCLORs) were 20% to 30% higher than they were before the banking crisis in March. Their reasons range from market volatility to stricter regulation.
The May survey found that the crisis had led some banks to raise their reserves. Three-quarters of mid-sized bank executives said their cash levels had returned to normal after the sharp increases in March and April, while one executive said cash levels were higher. They all say they're more conservative in business.
BankUnited CEO Raj Singh said the bank raised its cash level to $2 billion during the banking crisis, but by the summer it had fallen to pre-March levels of about $400 million.
Jason Darby, chief financial officer of Amalgamated Bank, said that after March, they increased coverage for the riskiest portion of uninsured deposits from 185% to more than 200%. These deposits come from new customers who have been with this bank for less than 5 years.
"It feels like the events of March happened yesterday," Darby said. "That's how we've been thinking about managing our business conservatively. ”
What is the minimum margin required?
The estimate of the minimum reserve for banks is in the range of 25 trillion dollars to 3between $3 trillion. Currently, the total amount of such reserves is close to 35 trillion dollars;Another $820 billion or so is held by entities such as money markets**.
A treasurer at a medium-sized bank estimated that the threshold was at 2Around $9 trillion to $3 trillion, while an executive at a major bank said it could be in the middle and upper end of the range in the short term.
The big bank executive said a survey of finance** showed that most expect to reach that threshold around the middle of next year. But it also highlights the uncertainty: Some executives expect that line could be breached as early as February or March.
Fed Chair Jerome Powell has said that the Fed sees no reason to change the pace of Qt. He said last month: "It is difficult to say that foreign exchange reserves are close to scarcity at the moment. ”
Broadly speaking, liquidity in the financial system is the sum of reserves held by banks and money in the money market** and other institutions deposited with the Fed overnight, known as reverse repos. This level is influenced by the Federal Reserve's balance sheet and the Treasury General Account, which holds cash to pay U.S. bills**.
The last time the financial system found that liquidity had fallen too low was in 2019, when bank reserves reached 1Around $5 trillion. The Fed had to step in.
Executives said the bar may have risen since then, in part due to increased economic activity and tighter regulation.
Act conservatively. The treasurer of the mid-sized bank said he considered the ratio of cash held by domestic banks to their assets and set it at a minimum reasonable level of around 9%.
The Minister of Finance began to calculate from 2019, when the ratio was well below it for a period of time and the market suffered. Before the crisis in March, it broke through 9% again.
At the same time, there may be more liquidity tests in the coming weeks, making Wall Street nervous.
Year-end cash requirements are still to be sorted out. Early next year, the Treasury will develop a plan for bond issuance that will burn cash. John Velis, a foreign exchange and macro strategist for the Americas at BNY Mellon, said, "Tax season is coming, and we will need more cash. ”