By Jeff Huther
ABA DataBank
For many banks, their biggest sources of cash volatility are cash flows into and out of the U.S. Treasury. Demographic shifts are likely to increase this cash balance volatility, which will, when combined with post-crisis changes to the fed funds market, have implications for bank liquidity and capital management. Banks will want to review and monitor their risk metrics to ensure they align with the volatility of government cash flows, that their liquidity buffers are properly calibrated and that reporting timing does not distort key balance sheet metrics, such as those related to capital.
Background
Prior to 2009, the U.S. Treasury kept most of its cash in accounts at commercial banks. This practice meant that, while individual banks would see fluctuations in the government’s accounts from taxes flowing in and government expenditures flowing out, the net effect across banks was relatively small and imbalances were easily corrected through interbank lending.
The financial crisis led to changes in the financial system that have resulted in the Treasury keeping all of its cash at the Federal Reserve. Taxes now flow to the Treasury’s account at the Fed and government expenditures now flow out of Treasury’s account at the Fed. A tax payment now, for example, leads to a reduction in the reserve balance of the taxpayers’ bank and an increase in Treasury’s account balance at the Fed. Individual banks see reductions in deposits and their reserve positions while, in aggregate, banks have fewer reserves to allocate among themselves.
Fluctuations in bank reserves mean some banks need larger liquidity buffers in anticipation of fewer reserves. Unlike the pre-2009 system, tax receipts and expenditure payments are not simply transfers from one bank account (e.g. the taxpayer) to another (the Treasury), possibly even at the same bank—they are transfers entirely out of or into the insured depository system. In addition, as the Fed’s quantitative tightening progresses, flows to and from the Treasury will create relatively higher changes in banks’ aggregate reserve holdings.
Volatility
The volatility of the government’s cash flow has been rising steadily (see Figure 1). The primary drivers of this volatility are built into our core social programs and the way the government funds itself. Without significant changes to how entitlements are received and taxes are paid, this volatility will continue to grow. One implication of this growth is that banks’ liquidity needs will also grow.
Figure 1: Increasing volatility of U.S. Treasury cash flows
Source: Daily Treasury Statements, excludes debt transactions
Even on a smoothed 90-day basis, the Treasury’s cash flows are volatile. The volatility of the deposits stems from different payment dates for corporate and estimated tax payments by individuals. Estimated payments, for example, are due on the 15th day of the fourth, sixth, ninth and first months of a calendar year, with the latter deadline for the previous year). The expenditures line, except for pandemic expenditures, appears more stable because most payments are made at least monthly.
Cash flows of significance
For a variety of historical and institutional reasons, Treasury’s cash flows are irregular but, for the largest categories, predictable. The outflows are large by any measure; the Congressional Budget Office projects $7 trillion in outlays and over $5 trillion in receipts for fiscal year 2025, numbers that are projected to steadily rise over the 10-year forecast horizon. To manage the associated cash flows, the Treasury issued almost $29 trillion in debt and repaid over $27 trillion in maturing debt in FY 2024. From the perspective of banks, managing the other side of Treasury’s cash flows would be easier if those flows were evenly spread across days in a month, or in the case of some receipt categories, evenly across calendar quarters.
Irregular operational cash flows
The Treasury made average monthly payments of $730 billion in FY 2024, of which 47% went to beneficiaries of Social Security, Medicaid/Medicare and Veterans Benefits (all numbers excluding debt transactions). Benefit payment outflows from the Treasury only go to banks’ depositors accounts on a few days in any given month (see examples in Figure 2). The effect is that the deposit accounts that banks provide act as cash buffers between the government and their depositors, leading to high balance sheet volatility.
Figure 2: Government program payment examples
Source: Daily Treasury Statements
Social Security payments are unique among the large benefits programs. While other entitlement payments are made on a single day within a month (e.g., Medicare/Medicaid and Veterans Benefits, Figure 2 top panel), Social Security recipients’ monthly payments are spread roughly equally across four days in a month (the third of the month and the second, third and fourth Wednesdays, Figure 2 bottom panel).
The difference a day makes
Bankers, supervisors and analysts assess financial health using calendar date reporting. But the U.S. government’s payment policies and practices make interpretation of swings in banks’ assets and liabilities more difficult. If a calendar quarter begins on a weekend or holiday, for example, some payments are pushed from the previous quarter into the new one. The result is that deposits appear to rise in some quarters and fall in others.
As an example of the effects of government payment policies, consider a comparison of the first quarter of 2024 with the first quarter of 2023. March 31, 2023, fell on a Friday, and March 31, 2024, fell on a Sunday, resulting in Treasury paying out $85 billion more on the last business day of the first quarter of 2023 (March 31) than on the last business day of the first quarter 2024 (which happened to be March 29) for the 10 largest expenditure categories excluding interest payments (see Figure 3, top panel).
Figure 3: Tos-and-fros of the U.S. Treasury
Source: Daily Treasury Statements
The cash flow differences reversed on the first business day of the next quarter, which may have led to misinterpretations of quarter-end bank balance sheets (Figure 3, bottom panel). The “All Other” category on the right panel for April 3, 2023, is high because large Social Security payments are made on the third calendar day of the month which, in this case, is also the first business day of the month.
Conclusion
Banks’ cash balances move around a lot, partially from bank decisions but mostly from customer needs. For many or even most banks, their biggest source of cash volatility is the U.S. Treasury. Given our aging population, cash balance volatility will grow with increasingly large payments for programs like Social Security and Medicare. For banks, this volatility increases the complexity of cash management. The size of bank balance sheets could be smoothed by spreading payments across more business days in a month.
For additional research and analysis from the ABA’s Office of the Chief Economist, please see the OCE website.
