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The demand for the Federal Reserve’s rarely used Standing Repo Facility (SRF) reached its highest level since 2020 this week, prompting speculation about potential preparations by banks for future liquidity challenges as the central bank continues its balance-sheet unwind. Counterparties accessed the SRF, where eligible banks can borrow reserves in exchange for Treasury and agency debt, for $203 million on December 5. While this amount is relatively small, it marks the highest utilization since July 2020, when the facility attracted $153 billion during a peak period. Demand for the facility subsided to $6 million on Wednesday.
Market observers are closely monitoring the SRF for any signs of instability, especially as the Federal Reserve has been unwinding its balance sheet for the past 18 months, leading to a decrease in excess liquidity. The recent rise in short-term borrowing costs after month-end, coupled with concerns about dealer balance sheets’ capacity to provide funding, has heightened scrutiny. The Secured Overnight Financing Rate (SOFR) surged to a record-high 5.39%, causing investors to be on alert for potential market disruptions; it was at 5.33% on Tuesday.
Steven Zeng, a strategist at Deutsche Bank AG, noted, “The chatter is a specific bank just got set up for the SRF and tested it,” indicating that market participants are assessing the facility in light of recent SOFR fluctuations.
Representatives from the New York Fed declined to provide comments on the matter.
The Standing Repo Facility was reintroduced by the central bank in September 2019 amid turmoil, and it became a permanent backstop in July 2021. Initially designed to address a shortage of bank reserves, the facility’s relevance has gained attention as the Federal Reserve’s balance-sheet unwind progresses. While some questioned its efficacy due to limited accessibility, recent developments indicate increased interest, with five banks added as counterparties in the past two months, bringing the total to 25, including the New York branch of Norinchukin Bank on December 1.
