In the Market: Wall Street eyes waning cash pile with anxiety

Amalgamated Financial

12/12/2023 11:00

(Repeats with no change to text)
    By Paritosh Bansal
       Dec 12 (Reuters) - U.S. short-term financing markets saw
a three-day spike in interest rates at month-end. That's left
Wall Street wondering whether the financial system is running
out of cash. 
    A spike in repurchase agreements, or repo, where investors
borrow against Treasury and other collateral, can be a sign that
cash is getting scarce. Markets need a minimum amount of
liquidity to function smoothly.
    Eventually, the elevated level of the interest rate, called
the Treasury GCF Repo Index  USTSYRP=DTCC , between Nov. 30 and
Dec. 4 was explained by factors other than cash scarcity, such
as month's end book-closing by banks and hedge fund trading,
interviews with more than half a dozen bank executives and
market participants show. 
        But it set Wall Street abuzz. The U.S. Federal Reserve
is draining hundreds of billions from the financial system by
selling bonds in a process called quantitative tightening (QT)
to normalize monetary policy after the pandemic-era stimulus.
That has caused concern that cash levels could be approaching a
tipping point, the executives said.
    One problem for the market is that there is no consensus on
how much cash in the system is too little, and so there is no
telling when that level might be breached. Estimates vary
widely, adding to the jitters.       
    Tell Alessio, treasurer at regional lender Cadence Bank
 CADE.N , said while they have access to ample liquidity they
are watching for the threshold below which market functioning
could be disrupted. 
    "We actively monitor the repo markets for leading indicators
of what that lower boundary is," Alessio said in an email.     
    
    
    The interviews with bank executives, some of whom requested
anonymity to speak freely, also provide a flavor of a Fed survey
of senior finance officers. The executives work at banks that
combined oversee several hundred billion dollars of assets.
        In the survey, the Fed polls for information such as the
lowest comfortable level of reserves (LCLOR), below which the
financial system starts to get impacted. The Fed did the last
survey in September but has not released results, leaving only
data from May in the public domain.  
    Two sources at a major U.S. bank said their LCLOR was up by
20% to 30% above what they were before the March banking crisis.
Their reasons ranged from market volatility to tighter
regulation.
    The May survey found that the crisis had led some banks to
raise reserves. Three of four mid-sized bank executives said
their cash levels have returned to normal after increasing
many-fold in March and April, while one said it had higher
levels. They all said they were being more conservative in
business. 
    Raj Singh, CEO of BankUnited  BKU.N , said his bank had
increased cash levels to $2 billion during the banking crisis,
but had brought it down to pre-March levels of around $400
million by the summer. 
    Amalgamated Bank  AMAL.O  CFO Jason Darby said they had
increased coverage of the riskiest portion of their uninsured
deposits to over 200% from 185% after March. Such deposits come
from its newer customers, who have been with the bank for less
than five years.
    "It feels like the events of March are literally only
yesterday," Darby said. "That's the way we've been thinking
about trying to manage our business conservatively."
        
    HOW MUCH IS NEEDED?
    Estimates of the minimum amount of bank reserves needed
range from about $2.5 trillion to $3.3 trillion. Such reserves
currently total nearly $3.5 trillion; another $820 billion or so
is held by entities like money market funds.
    One treasurer at a mid-sized bank calculated the threshold
to be around $2.9 trillion to $3 trillion, while an executive at
a large bank said it might be in the middle- to higher-end of
the range in the short term. 
    The large bank executive said a survey of financial officers
showed most expected to hit the threshold around the middle of
next year. But it also underscored the uncertainty: Some
expected it could be breached as early as February or March. 
    Fed Chair Jerome Powell has said the bank sees no reason to
change the pace of QT. "It's hard to make a case that reserves
are even close to scarce at this point," he said last month.
    In broad strokes, financial system liquidity is the sum of
reserves held by banks and money parked overnight with the Fed
by money market funds and others, called a reverse repo. The
levels are affected by the Fed's balance sheet and the Treasury
Department's general account, where it keeps cash to pay the
U.S. government's bills.
    The last time the financial system found out liquidity had
dipped too low was in 2019, when bank reserves hit around $1.5
trillion. The Fed had to step in.
    Since then, the threshold has likely increased, in part due
to the growth in economic activity and tighter regulations, the
executives said. 
 
   
    AN ESTIMATE
    The mid-sized bank's treasurer said he looks at the ratio of
cash held by domestic banks and their assets, setting his lowest
comfortable level at around 9%. 
    The treasurer draws from 2019, when the ratio fell well
below that for a sustained period and markets were affected. It
again breached 9% ahead of the March crisis.
        The ratio is now above 10%. Roughly $200 billion to $230
billion of cash drain would bring it down by a percentage point,
the treasurer estimated. 
        But before bank reserves get hit, the system has a
buffer in the Fed's reverse repo facility, leading to questions
about whether that can be drained to zero. A New York Fed survey
shows Wall Street expects the Fed to stop QT when the facility
hits $625 billion.     
    Meanwhile, more tests to liquidity are likely in the coming
weeks, keeping Wall Street on edge. 
    Year-end cash needs still have to be sorted. Early next
year, the Treasury will lay out plans for debt issuance that
would eat into cash. Then, the tax season will be upon us with
more cash needs, said John Velis, forex and macro strategist for
the Americas at BNY Mellon.
        "That's another thing to keep in mind as a wild card,"
he said. 
        
  

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Repo spike    https://tmsnrt.rs/3TgzQLP
Bank liquidity    https://tmsnrt.rs/489OeJS
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 (Reporting by Paritosh Bansal; Editing by Megan Davies and Anna
Driver)
 ((paritosh.bansal@thomsonreuters.com;))