Persistently massive inflows of cash into a key Federal Reserve facility are in large part being driven by a bank liquidity regulation change from last year, a report from the New York Fed said Friday.
The Fed’s facility offers what are called reverse repos, which allow eligible firms to park cash at the central bank in exchange for a risk-free return. The rule playing a role in the inflows is a regulation called the Supplementary Leverage Ratio, which determines how much liquidity banks need to have on hand.
After the regulation change banks were less inclined to take deposits, and that cash instead flowed to the money funds, which had to invest that money somewhere, the paper said. Meanwhile, banks reduced short-term debt offerings, constraining what money funds could invest in. And on top of that, Fed rate hikes further drove cash into money market funds as financial markets navigated a shift in the cost of short-term borrowing, according to the authors.
The Fed’s reverse repo facility was largely unused into the spring of 2021 and then inflows steadily ramped up. Inflows peaked at $2.426 trillion at the end of September before easing slightly to Friday’s inflow of $2.05 trillion.
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