Banks’ ‘lowest comfortable level of reserves’ largely unchanged from last August, Fed report shows

A February survey of senior financial officers of banks representing some 75% of total banking system reserves showed that respondents’ “lowest comfortable level of reserves” was $650 billion, largely unchanged from the previous survey, a Federal Reserve Board survey report showed Friday.

The last such survey was in August 2019. In that survey, the lowest comfortable level of reserves reported was $652 billion. Then, respondent banks’ total average reserve balance holdings in July 2019 were $1.152 trillion.

The Fed said its February survey asked banks’ senior financial officers about their institutions’ reserve balance management strategies and practices employed in January 2020. However, it noted the Fed has taken a variety of actions since then to support market functioning and the flow of credit to businesses and households in the face of impacts of the COVID-19 (coronavirus) pandemic. “These actions have notably increased the size of the Federal Reserve’s balance sheet and the amount of reserves in the banking system,” the Fed report notes. “Reserve management practices may have changed as a result.”

The Fed said it received survey responses from 78 banks (of 80 surveyed), including 45 domestic banks and 33 U.S. branches and agencies of foreign banking organizations, and representing roughly three-fourths of total reserve balances in January. The survey was distributed Jan. 31 with responses due Feb. 14.

The survey report summarizes key takeaways as follows:

  • Survey respondents indicated that their lowest comfortable level of reserves (LCLoR), given the constellation of short-term interest rates prevailing at the time of the survey, was approximately $650 billion, roughly unchanged relative to the previous survey. By comparison, these banks total average reserve balance holdings in January 2020 were roughly $1.25 trillion.
  • Almost half – 44% – of respondents rated covering routine intraday timing mismatches between payment outflows and inflows as a “very important” consideration in determining their LCLoR. Forty percent (40%) characterized protecting against the risk of not receiving scheduled payment inflows that could result in a negative end-of-day Fed account as “very important.”
  • A slight majority, 45 respondents, indicated that their reserve management strategy included a level – greater than their LCLoR – above which they would be willing to redeploy reserves into other high quality liquid assets (HQLA). For those states of the world in which their reserve balances are equal to or above this level, over four-fifths of respondents (60 of 71) indicated 0 – 15 basis points as the lowest spread relative to the interest on excess reserves (IOER) rate at which they would be willing to redeploy reserve balances into other Level 1 HQLA.
  • Most respondents, 86%, indicated that they had not altered their reserve management strategy following the money market volatility in mid-September 2019.
  • More than 80% of respondents indicated that their redeployment of reserve balances into wholesale funding markets in mid-September, compared with the first week in September 2019, had remained unchanged or decreased. For those who increased their redeployment during this period, most – 10 of 13 respondents – rated the attractiveness of expected risk-adjusted returns on overnight secured assets relative to the IOER rate as a “very important” factor driving these decisions.

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

February 2020 Senior Financial Officer Survey

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