A series of events are expected between March and May, some of which will reduce the amount of cash in the financial system, while others increase the demand for liquidity, according to interviews with banking executives cited by Reuters.
Those events include the expiration of the BTFP lending facility, an expected demand for cash and massive issuance of US government debt, quarter tax payments, quantitative tightening and the shift to T+1 among them.
“Liquidity could start to show some cracks as funding needs continue to grow,” said James Tabacchi, CEO of South Street Securities, an independent broker dealer active in Treasury markets. “It is a balancing act, and it won’t take a lot to cause a disruption in the funding markets.”
Amalgamated Bank, with about $8 billion in assets, enhanced its contingency planning exercise this year to take into account more unlikely scenarios, CFO Jason Darby said. For example, the bank had planned for what if some of their typical funding sources, such as the Federal Home Loan Banks, were suddenly not available.
“That’s a very unlikely scenario,” Darby said. “But I believe companies are doing themselves good service by thinking through more draconian situations and making sure that they’ve got adequate liquidity options.” The bank has been using the Fed’s BTFP, the facility that expires in March, to a modest extent and is considering rolling over a loan that matures before the deadline for another year to take advantage of its terms.
John Velis, forex and macro strategist for the Americas at BNY Mellon, said that when repo blew up in 2019, it “really started to hit home” as quarterly corporate taxes came due that month: “We don’t know when we get to that point from abundant” to insufficient liquidity…The market will tell us.”