Survey shows bank senior financial officers ‘comfortable’ holding less reserves than last time surveyed

Banks’ senior financial officers surveyed in August reported an aggregate $51 billion decrease in what they viewed as their “lowest comfortable level” of reserve balances since the question was raised six months ago, the Federal Reserve Board said in a report Thursday.

Among respondents that participated in the February 2019 survey, about 30 percent in August reported a decline in their lowest comfortable level of reserve balances relative to February, the Fed reported. Foreign banks comprised just under two-thirds of this group of respondents, it said.

The Fed distributed the survey to senior financial officers at 80 banks on Aug. 6 and gave a response deadline of Aug. 20. Of those, 77 responded. Respondents held three-fourths of total reserve balances at the time of the survey, the Fed said.

The Fed reported these key takeaways:

  • Survey respondents indicated that their lowest comfortable level of reserve balances given the constellation of short-term interest rates prevailing at the time of the survey was slightly over $652 billion; for context, these banks’ total average reserve balance holdings in
    July 2019 were $1,152 billion, making up about three-fourths of total system reserve balance holdings.
  • The aggregate reported lowest comfortable level of reserve balances fell by about $51 billion from the February 2019 Senior Financial Officer Survey reported level of $703 billion, reflecting 21 repeat respondents that revised down by about $72 billion, which was partially offset by 12 repeat respondents that revised up by about $12 billion.
  • As was the case in the February survey, the majority of respondents ranked meeting routine intraday payments flows as the most important or second most important consideration in determining their lowest comfortable level of reserve balances.
  • For respondents that ranked meeting routine intraday payments flows as the most important or second most important consideration, the vast majority rated their expectations for days on which outflows are atypically high based on analysis of historical activity as an important or very important factor in determining routine intraday payment needs.
  • Roughly three-fourths of respondents from domestic banks reported increasing advances from Federal Home Loan Banks (FHLBs) as a likely or very likely action to replenish reserve balances in the short term and long term, while more than one-half of respondents from foreign banks were likely or very likely to borrow at various tenors in unsecured funding markets in order to meet funding needs in either the short or long term.
  • In the event that reserve balances fall below the reported lowest comfortable level of reserves, roughly 70% of respondents indicated they would take same-day or next-day action to begin rebuilding their reserve balances, with many also indicating the timing of action taken would depend on the nature and circumstances of the event.
  • About two-thirds of respondents that currently hold reserves significantly above their reported lowest comfortable level of reserves indicated that providing a cushion against potential outflows was an important or very important consideration.

The survey also addressed current reserve balance management strategies and practices.

Federal Reserve Board releases results of survey of senior financial officers at banks about their strategies and practices for managing reserve balances