Since mid-June, American banks have been parking cash to the tune of $ 700 billion and more night after night in a special facility of the Federal Reserve: at the end of July, the investment sum exceeded the $ 1 trillion threshold for the first time.
Since then, the daily volume has only stayed just below that.
The development in this usually neglected corner of the financial world is all the more remarkable given that the special facility was barely used for almost a year until the end of February and then quite sparingly.
Winand von Petersdorff-Campen
Business correspondent in Washington.
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Since 2013, the US Federal Reserve has offered banks to absorb their liquidity in so-called overnight reverse repurchase agreements or reverse repo transactions.
The banks take over government bonds and mortgage bonds from the central bank as security.
The Fed offers this option to hedge its own monetary policy.
The Fed's quantitative easing bond purchases are flooding the financial market with at least $ 120 billion a month in liquidity.
With the facility, the Fed is trying to neutralize the additional liquidity so that it does not disrupt key interest rate policy and push short-term interest rates below zero.
Up to $ 2 trillion possible
In mid-June, the Federal Reserve raised interest rates on its investments from 0 to 0.05 percent, triggering an investment boom. The timing was chosen deliberately because the banks were faced with an additional challenge to accommodate their liquidity. The US Treasury Department issued fewer and fewer short-term Treasury notes. These served the banks as an alternative way of securely parking liquidity. But the Treasury Department is legally forced to lower its cash reserves and to reduce the issuance of its own bonds in order not to breach debt limits.
Congress has not yet been able to agree on an increase in the debt ceiling and has now forced Treasury Secretary Janet Yellen to take first steps to ensure the government's solvency for the next few weeks. The result is that there is even more liquidity to park. Analysts predict daily reverse repos could run from $ 1.3 trillion to $ 2 trillion this year.
John Canavan, an analyst at Oxford Economics, sees the development as confirmation of a trend that has been ruling for years: instead of investing in research or productive asset classes, banks prefer to park their money safely. The tendency can also be seen in the share buyback programs. Nonetheless, he expects relief in reverse repo transactions soon after an agreement on the debt limit in Congress and at the latest when the Fed shuts down its bond program. He expects that at the beginning of next year.