Federal Reserve releases results of survey of senior financial officers at banks about their strategies and practices for managing reserve balances

February 2020 Senior Financial Officer Survey

Key takeaways from the survey included the following:

Survey respondents indicated that their LCLoR (lowest comfortable level of reserves), given the constellation of short-term interest rates prevailing at the time of the survey, was approximately $650 billion, roughly unchanged relative to the previous survey. By comparison, these banks’ total average reserve balance holdings in January 2020 were roughly $1.25 trillion.

Almost half—44 percent—of respondents rated covering routine intraday timing mismatches between payment outflows and inflows as a “very important” consideration in determining their LCLoR. Forty percent characterized protecting against the risk of not receiving scheduled payment inflows that could result in a negative end-of-day Fed account as “very important.”

A slight majority, 45 respondents, indicated that their reserve management strategy included a level — greater than their LCLoR — above which they would be willing to redeploy reserves into other HQLA. For those states of the world in which their reserve balances are equal to or above this level, over four-fifths of respondents (60 of 71) indicated
0–15 basis points as the lowest spread relative to the IOER rate at which they would be willing to redeploy reserve balances into other Level 1 HQLA.

Most respondents, 86 percent, indicated that they had not altered their reserve management strategy following the money market volatility in mid-September 2019.

More than 80 percent of respondents indicated that their redeployment of reserve balances into wholesale funding markets in mid-September, compared with the first week in September 2019, had remained unchanged or decreased. For those who increased their redeployment during this period, most — 10 of 13 respondents — rated the attractiveness of expected risk-adjusted returns on overnight secured assets relative to the IOER rate as a “very important” factor driving these decisions.

The full survey is available at https://www.federalreserve.gov/data/sfos/files/senior-financial-officer-survey-202002.pdf

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