(Bloomberg) — As money market funds flock to the Federal Reserve’s overnight reverse repurchase agreement facility for yield, major US banks are using the program to divest unwanted deposits.
Banks are emerging as a major driver of demand for the Fed’s so-called RRP facility, whose use could approach $1.5 trillion by the end of October, according to Bank of America Corp. strategist Mark Cabana. Volumes soared last month, reaching an all-time high of $992 billion on June 30, as the facility serves as a last resort investment to clean up excess cash, especially with short-term funding rates hovering around zero.
The Fed’s balance sheet has continued to bulge as a result of continued asset purchases as the general treasury bill draws money back into the system. That, in turn, forced banks to take more cash, boosting deposits after the pandemic’s regulatory exemptions for reserves and Treasury bills expired in late March.
“A very prominent feature of the Fed balance sheet growth is the reluctance of private banks to accommodate the continued growth of reserves and deposits,” Cabana wrote in a note to customers. “From the perspective of the major US commercial bank, the O/N RRP functions as a tool to absorb excess cash into the system that banks do not want.”
On his call for second-quarter earnings, Jeremy Barnum, chief financial officer of JPMorgan Chase & Co. that leverage is now the bank’s “binding constraint” and acknowledged that “RRP helps a little on the deposit growth side, helps a little” with the management of the company’s additional leverage ratio.
Junk bank deposits have shifted in part to the money market funds, which then invest the money with the Fed at the RRP, which returns 0.05%. But the total assets of money market funds, which have grown by about $125 billion since mid-March — around the time usage in the Fed’s facility began to rise — doesn’t explain the facility’s full growth, according to the bank. cabana. Much of the RRP’s rise has been attributed to a shift in money market stocks, where funds have liquidated Treasury bills and allocated the proceeds to the Fed’s operation.
Bank of America expects demand for RRP to increase in the coming months as the Fed’s asset purchases continue and the Treasury’s cash balance continues to shrink “in a prolonged deadlock over the debt limit”. A sharp rise in holdings at the facility could also signal that large money market funds are maximizing their use, forcing policymakers to raise the $80 billion limit per counterparty.
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