Large banks would be ‘comfortable’ with 40% less reserve balances, survey finds

Large banks believe they could be holding much lower reserve balances – about 40% less – than they are holding now, largely because of the continued low-interest-rate environment, according to the results of a survey of senior financial officers released Thursday by the Federal Reserve.

In the survey, which the Fed said was conducted by the New York Federal Reserve Bank Feb. 7-21, respondents indicated that their lowest, comfortable level of reserve balances “was a bit over” $700 billion, the Fed said. The banks total average reserve balance holdings as of January 2019 (the latest reporting period during the time of the survey) were $1.2 trillion.

The senior financial officers who responded to the survey (representing 75 banks that held about three-fourths of total reserve balances in the banking system at the time of the survey) noted that their estimation of reserve balances needed reflected the “constellation of short-term interest rates” in force at the time of the survey.

Other highlights of the survey results noted by the Fed included:

  • Even though low interest rates were cited by the bank officials regarding reserve balances, more than half of all respondents reported that their lowest comfortable level of reserve balances would not change regardless of the interest rate environment. “Respondents from foreign banks were more willing to economize on their holdings of reserve balances in comparison to domestic banks if the opportunity cost to hold these balances increased,” the Fed said.
  • Meeting routine intraday payments flows was ranked as the most important consideration by 40% of respondents in determining their lowest comfortable level of reserve balances.
  • A very likely action to replenish reserve balances in the short term and long term would be to increase advances from Federal Home Loan Banks (FHLBs), about three in four of respondents from domestic banks reported. More than two in five respondents from foreign banks were very likely to borrow in unsecured funding markets in the short term and long term, the results showed.
  • More respondents reported being active lenders of cash in secured overnight wholesale funding markets than they were in similar unsecured markets.
  • Regarding the Fed’s intraday credit, the Fed said about three-fourths of respondents indicated that they felt comfortable to neutral about its use. “The majority of institutions that felt neutral to uncomfortable using intraday credit reported that their views on intraday credit did not affect their reported lowest comfortable level of reserves,” the Fed stated.

February 2019 Senior Financial Officer Survey