Banks worldwide are preparing for something BIG

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Global banks’ increasing liquidity hoarding, seen in the eurodollar space and reflected in the record highs of the Federal Reserve’s BTFP balance, heightened borrowings instead of repaying emergency funds, and a surge in the Foreign Repo Pool at FRBNY, indicates widespread caution. As US banks actively hoard cash, Reserve managers globally fortify dollar reserves, suggesting a coordinated move to prep defensively for potential financial challenges and prompting questions about the banking system’s readiness for turbulence or a banking crisis.

A surge in liquidity hoarding across the global banking system, especially in the eurodollar space, signals a brewing storm. Here’s a deep dive into the recent unsettling developments.

The Federal Reserve’s BTFP balance hit a record high.
Far from repaying emergency funds post the Silicon Valley Bank crisis, banks are increasing their borrowings, raising critical questions about underlying liquidity issues.

🌍 Another crucial sign: The surge in the Foreign Repo Pool at FRBNY, historically a warning signal. This trend, paired with the decline in USTs held in custody on behalf of foreign largely official owners, hints at broader concerns in international banking.

You have to wonder, if foreign officials are raising their liquidity buffers and activating their reserve assets, what are they seeing that you aren’t?

In the US, the H8 data reveals a massive buildup of cash on domestic bank balance sheets. Interestingly, a significant portion of this surge seems sourced from foreign affiliated offices, suggesting a complex web of global financial interdependencies.

Foreign Repo Pool:
An essential tool for foreign institutions to manage liquid US dollar liabilities. A sharp increase here indicates heightened concerns over global liquidity and the need for robust dollar buffers.

The connection between BTFP usage, foreign repo pool activity, and UST custody trends paints a picture of widespread caution in the banking sector. Banks globally are fortifying their defenses against potential financial upheaval.

US banks aren’t just passive observers; they’re actively hoarding cash and given the source may even be responsible for some of the problems with liquidity conditions in offshore eurodollar markets.

The question arises: are these actions contributing to the broader strain on global liquidity?

The Foreign Repo Pool’s history shows its role as a barometer of financial health. Its rapid growth, especially during crises, signals foreign institutions’ drive for safer, liquid dollar reserves amidst uncertain market conditions.

US treasuries disappearing from FRBNY custody further corroborates the narrative of increasing global financial unease. It’s a reactive measure by Reserve managers to enhance liquidity during tense times.

The big picture:
All these signs – BTFP records, foreign repo pool surges, UST custody changes, and US banks’ cash hoarding – are aligning. It’s a coordinated move by banks and Reserve managers, prepping defensively for looming challenges.

⚠️ Are we heading towards a soft landing, or is the banking system bracing for more turbulence?

While definitive answers are elusive, the signs are too significant to ignore. Banks seem to be gearing up for another round in the banking crisis.

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FDIC-Insured Institutions Q3 2023: Unrealized losses on securities totaled $683.9 billion in the third quarter, up $125.5 billion (22.5 percent) from the Q2 2023. Unrealized losses on held-to-maturity securities totaled $390.5 billion.