US Banks Have $1.4T in Excess Reserves Yet Need Daily "Emergency" Fed Actions

-edited

With $1.4 trillion in excess reserves, how can there be a problem with overnight funding?

Emergency Funding Continues

The Fed continued emergency repos today as firms are short of cash.

Fed Tackles End-of-Quarter Funding Angst by Extending Repo Plan

Bloomberg reports Fed Tackles End-of-Quarter Funding Angst by Extending Repo Plan

The New York Fed said it will conduct overnight repurchase agreement operations daily Monday through Friday until Oct. 10. The Sept. 23 operation will be for as much as $75 billion, while the actions thereafter will be for at least that amount. Separately, it will also conduct three 14-day term operations for an aggregate amount of at least $30 billion on Sept. 24, Sept. 26 and sept. 27, according to a statement.

“The Fed just reminded the market that they have complete control over the front-end if and when they want it,” said BMO Capital Markets strategist Jon Hill. “Given the volatility we saw this week, they want to ensure quarter-end goes as smoothly as possible.”

Complete Control?

That the Fed has to do these operations is a guaranteed sign that things are not under control.

Bad Optics

"It's very bad optics to have to come in with emergency anything day in and day out," said Danielle DiMartino Booth, CEO of Quill Intelligence.

Understanding the Issue

Overnight Lending?

We are clearly not talking about "overnight lending".

A crisis has been going on for days.

Beneath the crisis is my observation that companies are using overnight repos, continually, to fund normal operations. Parties no longer trust the collateral.

It took a mid-month crisis to flush this out.

The Fed's alleged solution is to give companies at least $30 billion "14-day" lending, repeated of course, indefinitely. This is on top of at least $75 billion daily.

Excess Leverage

I smell an excess leverage, borrow-short, lend-long scheme of some sort that has seriously gone awry.

Anyone else come to that conclusion?

Mike "Mish" Shedlock

Comments (61)
No. 1-24
Sechel
Sechel

Excess reserves are capital reserves held by a bank or financial institution in excess of what is required by regulators, creditors or internal controls. For commercial banks, excess reserves are measured against standard reserve requirement amounts set by central banking authorities.

Sounds like a regulatory definition and a regulatory one only. I haven't thought about this in some time but I think the market woke up and realize that banks are illiquid if not insolvent. Feels like a Fed bail-out of banks. Fed doesn't usually care about corporate funding.

You do bring up another angle about excess leverage which may be another factor.

Harry-Ireland
Harry-Ireland

I'm with you. Everything is leveraged to the hilt. I don't fully understand how this happened, but ever worse, I don't see a way out of this upside-down reality.

abend237-04
abend237-04

Isn't the primary dealer system supposed to minimize the risk of this ever happening, especially on multiple, consecutive days? Could it be that various parties worldwide have finally bought down Treasuries' yields to where primary dealers are acting like exchange "liquidity providers" and disappearing in a flash when algos run against them? I.e., quietly no-bidding and looking for better deals for their cash?

Maximus_Minimus
Maximus_Minimus

It makes you think of the definition of excess reserves. These were created as a result of QE, i.e. FED buying toxic securities at face value, and replacing expired ones with re-inflated securities. Was there a contract to buy these securities back in reversed repos?

Sechel
Sechel

Maybe repo rates are going up because nobody trusts anyone's collateral that isn't treasury

Bam_Man
Bam_Man

With so much European and Japanese sovereign debt now yielding less than zero, it was only a matter of time until the repo market began to seize up. Negative-yielding debt is unfit to serve as repo collateral or as Central Bank monetary reserves.

Tony Bennett
Tony Bennett

Not a collateral issue.

Lack of cash issue.

"The federal funds market consists of domestic unsecured borrowings in U.S. dollars by depository institutions from other depository institutions and certain other entities, primarily government-sponsored enterprises."

The question is why lenders lack cash? The bump in rates excuses - treasury issuance and corporate tax deadline were known weeks ago. Powell acknowledged these excuses, but FR caught flat footed by demand.

Someone(s) needs cash BAD.

Mish
Mish

Editor

"It makes you think of the definition of excess reserves. These were created as a result of QE, i.e. FED buying toxic securities at face value, and replacing expired ones with re-inflated securities. "

Not quite - The Fed pretty much bought Treasuries and Agencies not garbage (unlike the EU)

What banks did with the cash is another matter. The bottom line on bank-to-bank lending is there is no trust in bank balance sheet collateral as opposed to the Fed sitting on bad collateral.

Mish
Mish

Editor

"Not a collateral issue. Lack of cash issue."

Both really but lack of cash is a collateral issue. There is $1.4 trillion in excess reserves, banks would lend that if they can get more than interest paid on excess reserves. Yet the overnight rate shot to 10%.

That means no one trusted the collateral offered leaving someone short of cash.

Mish
Mish

Editor

"Maybe repo rates are going up because nobody trusts anyone's collateral that isn't treasury"

Correct observation

William Janes
William Janes

No. More likely to be the usual suspects: hedge funds like Renascence Capital, George Soros, and overseas fast money artists. They have uncovered a way to profit from causing this kind of turmoil in short term liquidity markets.

Matt3
Matt3

So who is needing the excess cash? My guess is that it's not needed for "normal banking". Maybe for the trading arms, hedge funds? If they need the cash and no one wants to lend it, I would guess the collateral isn't great. Banks (those not in the trading or brokerage business) have excess reserves. I think there is plenty of cash in the system. Fed should make those that need overnight funding raise capital.

abend237-04
abend237-04

Minsky moment, anyone?

thimk
thimk

going with mish's hypothesis , since we will never know who is borrowing at the discount window maybe we can determine the collateral types banks are refusing ? not that i can think of any (wink) .

Mish
Mish

Editor

Could be related to anything.

China, Iran, something in the EU, Saudi Arabia, Fannie Mae, Mortgage lending, or even the GM strike.

The Fed sure won't disclose. Is the Fed so clueless they don't really know?

Country Bob
Country Bob

There is no mystery here, and all the stories about a USD shortage are bull sh!t.

As I wrote yesterday, no one is going to lend money to an entity that won't (or probably won't) be able to pay it back tomorrow.

It doesn't matter if you hypothecate Treasuries as collateral, because (1) the checks to make sure one bond isn't hypothecated multiple times has broken down; (2) even if you have a claim against a Treasury bond, there is good reason to think a pompous bankruptcy judge (or corrupt Obama appointee) will simply ignore centuries of precedent and protect their political cronies.

Even if repo collateral is held at the FRBNY, if foreclosing on that collateral will send a major bank into Lehman Bros arms, the Fed might intervene and ignore the law. See LTCM, Bear Stearns, etc for examples where the Fed ignored the law.

When the politically connected don't even pretend to obey the law (see Comey and Brennan and McCabe and ...) people quite reasonably assume the law is a joke and only enforced on those without political connections.

Now excuse me... I'm going to smoke a joint, curse and stick my middle finger up at the SEC -- and see if I get the same treatment as Elon Musk

Six000mileyear
Six000mileyear

The quickest and safest way to resolve this distrust is to convert corporate bonds to shares and dilute the shares until remaining private debt becomes manageable. Additionally, banks would have to raise capital in the equity markets.

Ted R
Ted R

See if Soros' or any of the major currency speculators and their funds has made any recent money shorting the dollar. That will tell you lots about why the Fed is panicking. And they are. And if a war is brewing with Iran no doubt some OPEC nations will want to redeem their dollars into something else...like gold. This could be the beginning of a flight from dollars into whatever. If it is the U.S. is screwed.

Webej
Webej

@ Brutus' Admirer

The explanation explains nothing. The idea that a lot of the liquidity comes from Arab cash that is distracted by the latest ??? operation is ludicrous -- as if this isn't delegated to money managers who are paid to go to work.

As for the fact that TED and LIBOR are not spreading, LIBOR only measures interBank lending. What if the thirsty partners are non-Bank financial entities? What if it's parties that don't have access to the discount windows? SOFR rates (the designated replacement for LIBOR) ARE elevated.

Tax payments and increased bond issuance as a cause seems a non-starter to me, as long as there's Tr$1.35 in excess reserves. The main volume in Repo are treasuries, so it's not distrust of the collateral, unless the shortage is entirely limited to the non-treasury securities, which nobody is reporting.

I'm going with Country Bob's hypothesis.

Flatlaxity
Flatlaxity

If you want perspective on this issue, go to the guy who is a foremost banking -finance industry analyst and worker therein - R. Chris Whalen. This is his take on the subject issue: https://www.theinstitutionalriskanalyst.com/single-post/2019/09/19/Repo-Madness

As he says, the problem is an "LCR" (Liquidity Coverage Ratio) regulatory issue, passed following the "Great Recession."

Tony Bennett
Tony Bennett

Maybe banks would have more cash if they didn't:

NEW YORK (AP) — The nation's largest banks are rewarding shareholders by spending tens of billions raising their dividends and buying back stock after getting the green light from the Federal Reserve.

DchenHK
DchenHK

Try negative yielding bonds!

leicestersq
leicestersq

The funny thing to me is that this article talks about 'bad optics'. To me the real problem isnt that someone is in trouble, but that the system is now exposed as rigged because we can clearly see that some people inside the system know that someone is in big trouble and know who they are, but the rest of us dont have that knowledge. This asymmetry of knowledge impoverishes those who dont know and enriches those who do. If the Fed could take one action to help things, it would be to tell us exactly what is going on.

As for Mish's guess as to what it is, well it sounds about right. What Mish wont say, because use doesnt know, is who it is. Someone is desperate to keep the plates spinning for some reason. It must be a pretty amazing reason because if you have to borrow at 10% then you can be pretty sure that you have lost at that point and you need to come clean and wind yourself down. The Fed will know who this is, and the fact that they are lending to this bust entity rather than closing it down must mean it is a big player than they dont want to fail.