US bank reserves have fallen to their lowest level in four years

The level of reserves in the US banking system, which is an important indicator of financial stability, fell to $2.89 trillion, reaching its lowest level since October 2020. This situation has become a significant factor for the Federal Reserve, which continues its policy of reducing its balance sheet. 

According to Bloomberg, reserves decreased by $326 billion in the week ended January 1. This decline is due to seasonal fluctuations: at the end of the year, banks usually reduce the volume of active operations, including repo transactions, to strengthen their balance sheets to meet regulatory requirements. 

Part of the funds are directed to the Fed's overnight reverse repo facility (RRP), which reduces liquidity in the banking system. Balances on the accounts of this mechanism increased by $375 billion between December 20 and December 31, but already on January 4, they decreased by $234 billion. 

In addition, the Fed continues to withdraw excess cash through its quantitative easing program. At the same time, banks are gradually repaying loans received under the Term Loan Program, which further reduces the amount of available liquidity. 

These changes are causing concern among both financial experts and Wall Street strategists. To maintain the stability of the banking system, the minimum acceptable level of reserves, according to various estimates, is $3-3.25 trillion, including the buffer. 

The reduction in reserves underscores the complexity of the regulatory challenges facing the Fed, particularly in the context of ensuring financial stability and optimal liquidity in the US banking system.