Banks are signing up for the standing repo facility, a US Federal Reserve funding backstop that allows banks to borrow emergency overnight cash through repos using Treasury and agency mortgage securities as collateral.
In the wake of the bank runs last March, regulators have been pushing lenders to make sure they are prepared to deal with any deposit outflows in the future, said Bill Nelson, chief economist at the think-tank Bank Policy Institute, speaking to Reuters.
Other market experts also pointed to growing concerns that liquidity could get scarce in the coming months as the Fed drains hundreds of billions of dollars of excess cash from the financial system as it removes pandemic-era stimulus.
So far seven US regional banks have signed up – all after the March bank collapses. Overall, 26 banks, many of them affiliates of primary dealers, are currently counterparties. Together, they account for roughly two-thirds of all Treasury and agency securities held by banks, according to Reuters calculations, based on bank disclosures about their securities holdings.
First Citizens Bank is the most recent addition. John Moran, a spokesman, said the bank became a counterparty “to expand our monetization channels, including our repo facilities.”
A Fed poll last September showed 21 of 93 domestic and foreign banks surveyed expressed interest in signing up, while 39 said they didn’t want to. Seven have been added since the survey was done, suggesting more are in the pipeline.
The backstop has not had to be used in a crisis yet, but the market participants said a pall hangs over it. One of the sources, a top banking executive, said the industry worried about the prospect of being criticized by politicians for taking money from the government.