The trouble is, post-crisis rules enacted to curb risk-taking, like Dodd-Frank and Basel III, have prompted banks to use much of those same reserves -- upwards of $2 trillion worth -- to meet the more stringent requirements. It’s those forces that are, in effect, creating the scarcity of reserves that has banks -- mainly the smaller ones at this point -- scrambling for short-term dollar funding. Since the Fed started shrinking its assets, reserves have fallen by more than a half-trillion dollars, according to Fed data from Barclays.
“The current backdrop is one that is dominated by the regulatory landscape,” said Jonathan Cohn, the head of interest-rate trading strategy at Credit Suisse. He estimates excess high-quality liquid assets (which include reserves) at the eight U.S. globally systemically important banks have fallen by more than 15 percent since the Fed began its unwind. “Banks are in a decent position right now, but over time this will begin to weigh” on them.
The pace of the Fed’s balance sheet unwind is picking up and that is beginning to make considerations of what that means for related markets more urgent. A balance of $900 billion before the credit crisis is the base line but if we add the $2 trillion of bank reserves to that figure, we get close to $3 trillion. The Fed’s balance sheet is now $4.13 trillion and trending lower. That is not a particularly large buffer particularly when a good proportion of the remaining part of the balance sheet is comprised of mortgage bonds with questionable liquidity.Click HERE to subscribe to Fuller Treacy Money Back to top