Liquidity issues at the U.S banks.

Hi Simon,

You’re right, headlines often make this sound scarier than it is. The US government shutdown is underway, but markets have shrugged it off for now, with the S&P 500 pushing to new highs.

The “reserves” being referenced are deposits that banks hold at the Federal Reserve. These move up and down with the Fed’s balance sheet activities — for example, during quantitative tightening the Fed lets assets roll off, which drains reserves. That’s what we’re seeing now, and it’s not unusual.

Separate to that, banks also hold regulatory capital buffers — the equity cushion that absorbs losses if things go wrong. These requirements were lifted after the GFC but have been eased more recently, freeing banks to lend more. That can help the economy by offsetting the Fed’s tightening, though the trade-off is thinner safety margins if a shock arrives.

The risk would be if reserves and capital buffers were cut too far, but US banks remain well capitalised, and the Fed has liquidity tools on hand if stress re-emerges. We don’t see this as a repeat of last year’s regional bank wobble, let alone another GFC.

Banks are still highly leveraged and sensitive to the cycle, and valuations are elevated, so we wouldn’t have all eggs in the banking basket. But at this stage, it looks more like normal monetary plumbing than an imminent crisis.

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Reserve Balances with Federal Reserve Banks

LAST UPDATED 02/10/2025 16:45

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Reserve Balances with Federal Reserve Banks

LAST UPDATED 02/10/2025 16:45