Board of Governors of Federal Reserve System : Federal Reserve Board releases results of survey of senior financial officers at banks about their strategies and practices for managing reserve balances

September 2020 Senior Financial

Officer Survey

B O A R D O F G O V E R N O R S O F T H E F E D E R A L R E S E R V E S Y S T E M

Summary

In September 2020, the Federal Reserve conducted a Senior Financial Officer Survey to gather views systematically from a number of banks concerning how the increase in reserve balances in the banking system that occurred over March and April 2020 may have affected the reserve management behavior of individual banks. In response to the pandemic, starting in March 2020, the Federal Reserve began to take a number of actions, including purchasing Treasury securities and agency mortgage-backed securities (MBS) and establishing liquidity facilities, to support the flow of credit to households and businesses and the smooth functioning of critical financial markets. An increase in Federal Reserve assets leads to an increase in reserve balances in the banking system, all else being equal.1 The amount of reserve balances increased roughly $1.4 trillion over March and April 2020. The September survey focused on gaining information on the implications of this increase in reserve balances for individual banks and on obtaining banks' views on Federal Reserve liquidity provisions.2

In order to learn how this increase in reserve balances in the banking system may have affected the reserve management decisions of individual banks, the first part of the Septem- ber survey asked respondents about increases in their reserve balances since the spring and about expected changes in their reserve balances over the remainder of the year. The survey also asked respondents about the actions they might take to manage their balances to these expected levels. Respondents who expect to take action to decrease the level or growth of their average end-of-day reserve balance in December relative to August were asked to rank, in order of importance, the factors that may prompt their firm to do so, as well as to rate the potential asset adjustment and liability adjustment actions that their firm would pursue.

The subsequent parts of the survey focused on banks' views on Federal Reserve liquidity pro- vision. In light of temporary changes to the administration of the Policy on Payment System Risk and changes to the discount window, the survey asked respondents to characterize their views on the use of intraday credit and the discount window and to rate the factors driving their views. The survey also asked respondents about their use of the Paycheck Protection Program (PPP) and the Paycheck Protection Program Liquidity Facility (PPPLF).

The Federal Reserve distributed the survey to senior financial officers at 80 banks on Septem- ber 18, 2020, with replies due by October 2, 2020.3 Responses were received from all 80 banks, which in aggregate held roughly three-fourths of total reserve balances in the banking system at the time of the survey. As in previous surveys, the banks sampled in the survey represented a wide range of asset sizes and business models. Responses were collected from senior financial officers at 46 domestic banks and 34 U.S. branches and agencies of foreign banking organizations (FBOs).4

1. See Jerome H. Powel (2020), "Current Economic Issues," speech delivered at the Peterson Institute for Interna- tional Economics, Washington, May 13,https://www.federalreserve.gov/newsevents/speech/powell20200513a.htm.
2. The September 2020 survey was conducted by the Board of Governors of the Federal Reserve System in collabo- ration with the Federal Reserve Bank of New York.
3. Respondents were asked to specify the reserve holding entities that were covered in their survey responses.
4. As noted, the survey panel comprises 46 domestic banks and 34 foreign banks. The foreign banks consisted of U.S. branches and agencies of foreign banks as well as one U.S. commercial bank that exhibited reserve manage- ment behavior more akin to this group than similarly sized domestic banks.

1

2 September 2020 Senior Financial Officer Survey

Key takeaways from the survey included the following:

• The large majority of survey respondents' average end-of-day reserve balance positions
  over the period beginning March 1 and ending April 30 increased relative to Febru-
  ary 2020.5 Most of these survey respondents indicated that the "most important" or "sec- ond most important" driver of their decision to hold higher reserve balances was a need to be prepared for potential drawdowns on committed credit lines or a desire to conduct asset/ liability matching, given a large inflow of deposits with potentially high runoff rates or both.
• Reserves creation decelerated over the summer, and only about one-third of survey respon- dents' reserves increased in August relative to their average reserve position held over the spring (period beginning on March 1 and ending April 30). Most of these respondents cited that the most or second most important driver of reserve accumulation during this period was a lack of attractive alternative investment opportunities or a desire to conduct asset/ liability matching, given a large inflow of deposits with potentially high runoff rates or both.
• Over the remainder of the year, almost half of domestic survey respondents expect a decrease in their reserve levels relative to August. FBOs, by comparison, generally do not expect their reserve levels to change.
  -Roughly half of survey respondents indicated that they will take action to decrease the level or growth of their reserve balances from August to December.
  -The factor most often cited as the most or second most important driver for potentially taking action to decrease the level or growth of reserve balances was concern over net interest margins. Another frequently cited driver that ranked highly was an increase in
  the expected return on alternative high-quality liquid assets (HQLA) Level 1 investments relative to the interest on excess reserves (IOER) rate.6
  -On the asset side, the actions to decrease the level or growth in reserves most commonly cited as "likely" or "very likely" were increasing holdings of non-Level 1 HQLA securi- ties (for example, MBS or corporate bonds) or other Level 1 HQLA (for example, Treas- ury securities) or both. On the liability side, allowing outstanding term wholesale funding liabilities (for example, negotiable certificates of deposit or commercial paper) to mature without replacing them was the action most commonly cited as likely or very likely.
• Nearly one-third of survey respondents indicated they are more likely to consider the dis- count window as a source of liquidity than before the Federal Reserve's actions during the pandemic. Federal Reserve communications encouraging the use of the discount window to help meet the demand for credit from households and businesses were most often rated as "important" or "very important" in this consideration. Among those banks whose views on the discount window have not changed or that are less likely to consider it as a source of liquidity, concern about disclosures was most often rated as an important or very impor- tant factor.

1. Response share statistics are calculated using a denominator of respondents who provided a non-"N/A" ("not applicable") response to the question (80 respondents in this case). This convention is used throughout the summary.
2. For definitions of Level 1 HQLA and Level 2 HQLA, see Regulation WW-Liquidity Risk Measurement Stan- dards, 12 C.F.R. § 249.20 (2016).