In September 2020, the Federal Reserve conducted a Senior Financial Officer Survey to gather views systematically from a number of banks concerning how the increase in reserve balances in the banking system that occurred over March and April 2020 may have affected the reserve management behavior of individual banks. In response to the pandemic, starting in March 2020, the Federal Reserve began to take a number of actions, including purchasing Treasury securities and agency mortgage-backed securities (MBS) and establishing liquidity facilities, to support the flow of credit to households and businesses and the smooth func- tioning of critical financial markets. An increase in Federal Reserve assets leads to an increase in reserve balances in the banking system, all else being equal. The amount of reserve balances increased roughly $1.4 trillion over March and April 2020. The September survey focused on gaining information on the implications of this increase in reserve balances for individual banks and on obtaining banks’ views on Federal Reserve liquidity provisions.
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- Over the remainder of the year, almost half of domestic survey respondents expect a decrease in their reserve levels relative to August. FBOs, by comparison, generally do not expect their reserve levels to change.
—Roughly half of survey respondents indicated that they will take action to decrease the level or growth of their reserve balances from August to December.
—The factor most often cited as the most or second most important driver for potentially taking action to decrease the level or growth of reserve balances was concern over net interest margins. Another frequently cited driver that ranked highly was an increase in the expected return on alternative high-quality liquid assets (HQLA) Level 1 investments
—On the asset side, the actions to decrease the level or growth in reserves most commonly cited as “likely” or “very likely” were increasing holdings of non-Level 1 HQLA securi- ties (for example, MBS or corporate bonds) or other Level 1 HQLA (for example, Treas- ury securities) or both. On the liability side, allowing outstanding term wholesale funding liabilities (for example, negotiable certificates of deposit or commercial paper) to mature without replacing them was the action most commonly cited as likely or very likely. - Nearly one-third of survey respondents indicated they are more likely to consider the dis- count window as a source of liquidity than before the Federal Reserve’s actions during the pandemic. Federal Reserve communications encouraging the use of the discount window to help meet the demand for credit from households and businesses were most often rated as “important” or “very important” in this consideration. Among those banks whose views on the discount window have not changed or that are less likely to consider it as a source of liquidity, concern about disclosures was most often rated as an important or very impor- tant factor.