Banks Cite Intraday Payments Flows as Key Driver for Setting Reserve Floors

In a Federal Reserve survey released today, senior financial officers from 80 U.S. banks and U.S. branches of foreign banks reported that their lowest comfortable level of reserve balances was slightly over $652 billion, down slightly from a survey earlier this year.

When asked to identify drivers of the lowest reserve levels the bank was comfortable holding, a majority ranked meeting routine intraday payments flows as the most important or second most important consideration. The second most important driver was meeting internal liquidity stress metrics. Almost 50% of respondents indicated that seeking the interest paid on excess reserves was not an important factor in determining how much to hold in reserves.

Should reserves fall below the lowest comfortable level, a majority said they would seek advances from the Federal Home Loan Banks to rebuild balances in both the short term and the long term. Banks with shorter-term funding needs said they would be likely or fairly likely to borrow in unsecured funding markets. For longer-term needs, financial officers said they would consider increasing their retail deposit base by offering higher rates.