The Federal Reserve may be poised to loosen the reins on the economy with interest-rate cuts. But for now, banks are still keeping themselves on a relatively tight leash, according to a Wall Street Journal analysis. December featured a few notable moves in the market for short-term funding, often referred to as the “plumbing” of the financial system. That included brief jumps in the Secured Overnight Financing Rate, which is a measure of what it costs to borrow cash overnight collateralized by Treasury securities. Of course, year-end and even month-end volatility in money markets aren’t unusual, since banks often tidy things up before closing their books for the period. Nor were these episodes as acute as the surge in overnight rates seen back in 2019. What is catching people’s attention, though, is that these things are also popping up as there seems to be more than enough money sloshing around in the banking system, in the form of banks’ reserve balances at the Fed. The central bank’s chair, Jerome Powell, said in November that “it’s hard to make a case that reserves are even close to scarce at this point,” when reserve balances were about $3.3 trillion. In the last reading, they were over $3.4 trillion. But just because banks have resources available doesn’t mean they will necessarily use them to lend or facilitate trading. Instead, banks seem to have kept up some of their defensive behaviors from the spring banking crisis — even as investors seem ready to put the failures of Silicon Valley Bank and First Republic behind them. The KBW Nasdaq indexes for bigger banks and for regional banks are both up by more than 25% over the past three months.
