US bank reserve balances see largest drop since 2022 tax season
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The amount of reserves in the US banking system dropped by the most in two years as Americans paid income tax bills out of their bank accounts. Bank reserves totalled US$3.33 trillion in the week through April 17 from US$3.62 trillion the prior week, a decline of US$286 billion. This is the largest drop since the April 2022 tax deadline. The level of reserves is closely monitored by market participants and policymakers to gauge liquidity and potential impacts on financial markets. As reserves approach a level estimated to be between US$3 trillion and US$3.25 trillion, the Federal Reserve may need to consider altering its balance-sheet unwind. The current level of reserves is considered abundant, but policymakers aim for a slightly lower level. The Fed may need to slow the pace of runoff soon. If reserves shrink too much, it risks volatility in overnight funding markets. However, too many reserves consume bank capital and inhibit lending. Scarcity of reserves has caused problems in the past, such as in September 2019 when demand for liquidity surged and overnight funding markets experienced volatility.

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