(Bloomberg) -- Banks are paying up to protect their cash holdings from sinking further and to safeguard against future runs on deposits, according to Bank of America Corp.
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- Data show large time deposits — or certificates of deposit issued in amounts greater than $100,000 — have risen by about $675 billion since the beginning of the Federal Reserve’s balance sheet unwind in June 2022.
- “Banks likely want an extra buffer of cash due to rapid deposit outflows and to manage shareholder perception about their overall liquidity.”
- With the Fed pledged to keep interest rates at current levels for longer and deposits continuing to leave, the risk that bank reserves will deplete is increasing.
- That could force the monetary authority to halt its quantitative tightening earlier than intended.
- Nearly half of those respondents also reported increased borrowing from Federal Home Loan Banks as the result of the stress in March.
Scarcity has also caused problems in the past, most notably in September 2019, when the Treasury increased borrowing and the Fed stopped buying as many Treasuries for its balance sheet.
- Balances dropped by nearly $166 billion to $3.14 trillion in the week through Sept. 20, Fed data show. Wall Street strategists have estimated the banking system’s aggregate lowest comfortable level of reserves is somewhere around $2.5 trillion.
- Yet, the BofA strategists say, recent bank liquidity preferences may imply scarcity closer to when reserves are roughly 10% of GDP — which means QT might end once balances at the overnight reverse repo facility, or RRP, reach zero near the end of 2024.
- That’s because liquidity strained commercial banks might be unwilling to backstop the overnight repo market amid rising rates as its not seen as the equivalent to reserve cash holdings.
“We are uncertain of the macro conditions that will prevail when ON RRP depletes to zero,” Cabana and Craig wrote. “A higher for longer rate environment and continued bank deposit outflows could contribute to banks remaining liquidity strained towards end ’24, which risks funding pressure.”
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