Bank Executives Share Insights on Cash Levels
Major U.S. banks have reported an increase in their LCLOR by 20% to 30% compared to pre-March levels during the banking crisis. However, three out of four mid-sized bank executives stated that their cash levels have returned to normal after experiencing significant increases in March and April. One executive mentioned higher cash levels, while BankUnited CEO Raj Singh revealed that his bank decreased cash levels to around $400 million from a peak of $2 billion during the crisis.
Amalgamated Bank CFO Jason Darby highlighted that they have increased coverage for the riskiest portion of their uninsured deposits to over 200% from 185% after March. These deposits primarily come from the bank’s new customers, who have been with them for less than five years. However, despite these adjustments, Darby emphasized that the events of March still feel recent.
Determining the Minimum Cash Reserves
Estimates of the minimum level of bank reserves required range from $2.5 trillion to $3.3 trillion. Currently, reserves total nearly $3.5 trillion, with an additional $820 billion held by entities like money market funds. A treasury official at a mid-sized bank estimated the threshold to be around $2.9 trillion to $3 trillion. On the other hand, an executive at a large bank suggested that the system may approach the higher end of the range in the short term.
However, some large bank executives believe that it is premature to argue that reserves are scarce at present. Most financial officers surveyed anticipate hitting the threshold sometime in the middle of next year. It is important to note that the financial system’s liquidity comprises reserves held by banks and overnight funds parked with the Federals Reserve through reverse repo transactions. The Treasury Department’s general account, which holds cash for government expenditures, also affects these levels.
In 2019, the financial system faced a liquidity issue when bank reserves fell to approximately $1.5 trillion. Since then, the threshold has likely increased due to economic growth and tighter regulations. A treasurer at a mid-sized bank established a minimum comfortable level of around 9% by examining the ratio of cash to domestic banks’ total assets. A drain of approximately $200 billion to $230 billion in cash would decrease the ratio by a percentage point. However, before bank reserves are depleted, the system has a buffer with the Federal Reserve’s reverse repo facility.
Upcoming Liquidity Challenges
Further tests to liquidity are expected in the coming weeks, causing unease on Wall Street. The Treasury will announce plans for debt issuance early next year, which could reduce available cash. Additionally, the upcoming tax season will increase the need for cash. According to John Velis, forex and macro strategist for the Americas at BNY Mellon, these factors add uncertainty to the equation and should be considered as potential wild cards.