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It's actually measured as an average over a two-week period. Unsurprisingly, lending and borrowing activity is highest on the last day of the measurement period.

Generally speaking, banks try to maintain a steady reserve ratio over the whole period, but there's some wiggle room to play it a little loose and just borrow a lot on the last 1 or 2 days of the measurement period.

Source: I used to work at the Fed and studied these patterns.

Thank you for the extra clarification.

Why would the Fed allow this? Who created the regulation saying they needed a threshold and why aren't they putting more teeth into it? It seems silly to me to have a regulation without proper enforcement and it seems insane to me that the Fed is complicit.

I'm also interested why the FED would want to do this. Could it be to maintain interest rates at a certain target? If the banks don't have money to lend, would it cause them to charge higher interest on their loans?

Banks don't actually need money to lend money. They just create a loaned amount credit in one account and a corresponding asset consisting of a future revenue stream on the other side.

The cash reserve is just a collateral against the risk, needed to stabilize public trust they will not default at the slightest ill wind.

The banks have assets that are worth money they can post as collateral to borrow the cash to meet reserve requirements.

Or would you rather have banks unloading massive stacks of treasuries at market close daily to meet their cash needs, creating volatility in bond markets?

Repo lending means banks don’t have to unwind their positions daily due to a cash shortage, because they have other assets they can post as collateral for cash. It’s not a bad thing.

Tell me:

Why was the cash reserve regulation introduced? What problem did it address?

Why, if banks are not able to comply with this regulation without "unloading massive stacks of treasuries at market close daily", are they allowed to load up on "massive stacks of treasuries" flaunting the cash reserve regulation in the first place?

The cash reserve system was introduced to protect against a 1920's style bank run. The idea being that a bank should have enough liquid assets to cover 10 or 15% of their customers pulling all of their deposited funds out of the bank.

The goal of a bank is to make as much money as it can with it's assets. It's in the banks interest to loan out as much as it safely can while staying above the reserve requirements. If a bank were to dump it's assets to ensure it met reserve requirements it would likely sell at firesale prices which could drive down the price of those assets for the rest of the market. By taking a loan from the Fed and using those assets as collateral that scenario is avoided. It's also worth noting that these loans are not free, the Fed does charge interest.

So the bank avoids dipping below reserve requirements (and flooding the asset market) and the Fed earns a small amount of interest.

I guess my question would be then why did the bank originally allow themselves to loan too much out? From what you said, it seems like they loaned too much out and without the Fed they would then have to dip into their assets to meet the regulation. So it still seems like the bank messed up and the Fed is bailing them out (despite with interest). I agree it would be a problem for them to dump the assets but it also seems like a problem they are in this situation to begin with.

You're correct in that it means that the bank messed up. The idea is that this is for (relatively) small amounts to cover reserve funds for a short period of time. This may happen because large deposit accounts decided to withdraw unexpectedly or loan repayments stopped coming in. Ideally this is to be used for a day or maybe a week. However, you're correct that there is certainly potential for abuse in the system if a bank is doing this repeatedly every day for months or more. I'm not sure what, if any, measures are in place to prevent that abuse.

>In theory the bank is not allowed to fall below a certain reserve threshold because they would be too fragile towards bank-runs.

This is not true in reality. The only reserve requirements on financial institutions are on household deposits, and it's peace-of-mind that if 10% of Joe Public depositors show up one day demanding their money the bank won't have to deny.

Functionally there are zero reserve requirements on the vast major of financial institution assets. It's been a long time since the banks have been anywhere near reserve constrained. Many central banks don't even have reserve ratios (like mine in Canada).

Sure this stuff is complicated, but you can literally look it up on Wikipedia. The econ 102 money-multiplier model of deposits is not how modern banking works.

>It is an organized method by which the Fed facilitates regulation dodging for the financial sector.

This is borderline conspiracy theorizing, and it's kind of sad that people blindly accept it.

Thank you. This is actually first comment that explains whats going on. Now since my understanding is that this is something relatively new (in terms of volume pumped in) can someone explains WHY this is happening? Why banks need to dip below the line so often these days. And is this behaviour can come eventually with some negatvie consequences to banks or individuals holding loans, stocks etc?

Well, if you can trade all of your customers' money you make more profit! Yes your risk of collapse is higher, but that's somebody else's problem.

I would speculate that as this regulation dodge vehicle is being increasingly needed to be invoked, that means that the regulation is being skirted to a higher degree than in the past.

Since the regulation was introduced to reign in irresponsible freewheeling and extreme risk taking by banks, the logical conclusion must be that the banks despite the regulation that was intended to keep them into a position that was in line with their public responsibility are at it again.

So less regulation allows banks to use their clients money more aggressively. Then why would banks need to borrow so much money? And if its returned overnight, then why is FED keep pumping more and more?

Can something bad for market come out of it? Like one of big bangs bankrupting or something?

I am by no means an expert but I thought these repurchase agreements served a different purpose.

Lets say that you are Lerrill Mynch. You have 2 clients, today client 1 has $10,000 in AAPL and client 2 has $10,000 in cash. Client 1 decides to sell $10,000 in AAPL and Client 2 decides to buy $10,000 in Ford. You go to the market and find that Soldman Gachs has a client that wants to buy $10,000 in AAPL and MP Jorgan has a client looking to sell $10,000 in Ford. Everyone agrees and everything is happy.

Overnight Lerrill Mynch needs to makes sure that Soldman Gachs gets the 10k, Client 1 gets the shares in the security, MP Jorgan gets the 10k and Client 2 gets the Ford shares. In order to make sure that this whole transaction clears, Lerrill Mynch has to make sure that they have enough cash to cover the transaction.

If this is indeed the case, my outrage at the headline would seem warranted.

Yes, this. Well put