4. Funding Risks

Vulnerabilities from funding risks remained notable

Funding risks for most banks remained low, but some banks' reliance on less-stable forms of funding remained a concern. On the asset side, large banks that are subject to the liquidity coverage ratio (LCR) continued to maintain sound levels of high-quality liquid assets (HQLA).

Money market funds (MMFs) and other cash-management vehicles remained susceptible to runs owing to structural vulnerabilities. The recent SEC MMF reforms made prime and tax-exempt MMFs more resilient, but government MMFs and other short-term investment funds that were not covered by the SEC reforms have continued to grow.

Some open-end bond mutual funds remained vulnerable to significant withdrawals, as they are required to permit daily redemptions despite holding assets that can suffer losses and become illiquid under stress. Meanwhile, life insurers continued to be exposed to funding risks due to their reliance on funding from nontraditional liabilities.

In total, estimated runnable money-like financial liabilities increased about 7.5 percent over the past year, surpassing $22 trillion. This growth was mostly driven by an increase in assets under management (AUM) at domestic MMFs and in repurchase agreements. As a percentage of GDP, runnable liabilities have been relatively stable at 76 percent, a level around the historical median (see table 4.1 and figure 4.1)

Table 4.1. Size of selected instruments and institutions
Item Outstanding/total assets
(billions of dollars)
Growth,
2023:Q2–2024:Q2
(percent)
Average annual growth,
1997–2024:Q2
(percent)
Total runnable money-like liabilities1 22,078 7.6 4.9
Uninsured deposits 6,716 .9 10.8
Domestic money market funds2 6,053 12.7 6.2
Government 4,893 9.7 15.2
Prime 1,032 29.4 3.1
Tax exempt 128 14.4 −1.1
Repurchase agreements 4,963 9.8 5.9
Commercial paper 1,295 8.7 2.8
Securities lending3 995 5.1 7.3
Bond mutual funds 4,525 6.2 8.0

Note: The data extend through 2024:Q2 unless otherwise noted. Outstanding amounts are in nominal terms. Growth rates are nominal and are measured from Q2 of the year immediately preceding the period through Q2 of the final year of the period. Total runnable money-like liabilities exceed the sum of listed components. Unlisted components of runnable money-like liabilities include variable-rate demand obligations, federal funds, funding-agreement-backed securities, private liquidity funds, offshore money market funds, short-term investment funds, local government investment pools, and stablecoins.

 1. Average annual growth is from 2003:Q1 to 2024:Q2. Return to table

 2. Average annual growth is from 2001:Q1 to 2024:Q2. Return to table

 3. Average annual growth is from 2000:Q1 to 2024:Q1. Securities lending includes only lending collateralized by cash. Return to table

Source: Securities and Exchange Commission, Private Funds Statistics; iMoneyNet, Inc., Offshore Money Fund Analyzer; Bloomberg Finance L.P.; Securities Industry and Financial Markets Association: U.S. Municipal Variable-Rate Demand Obligation Update; DTCC Solutions LLC, an affiliate of the Depository Trust & Clearing Corporation: commercial paper data; Federal Reserve Board staff calculations based on Risk Management Association, Securities Lending Report; Markit Securities Finance; Investment Company Institute; Federal Reserve Board, Statistical Release Z.1, "Financial Accounts of the United States"; Federal Financial Institutions Examination Council, Consolidated Reports of Condition and Income (Call Report); Morningstar, Inc., Morningstar Direct; Llama Corp, DeFiLlama.

Figure 4.1. Ratio of runnable money-like liabilities to GDP remained around its historical median
Figure 4.1. Ratio of runnable money-like liabilities to GDP remained around its historical median

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Note: The black striped area denotes the period from 2008:Q4 to 2012:Q4, when insured deposits increased because of the Transaction Account Guarantee program. The "other" category consists of variable-rate demand obligations (VRDOs), federal funds, funding-agreement-backed securities, private liquidity funds, offshore money market funds, short-term investment funds, local government investment pools, and stablecoins. Securities lending includes only lending collateralized by cash. GDP is gross domestic product. Values for VRDOs come from Bloomberg beginning in 2019:Q1. See Jack Bao, Josh David, and Song Han (2015), "The Runnables," FEDS Notes (Washington: Board of Governors of the Federal Reserve System, September 3), https://www.federalreserve.gov/econresdata/notes/feds-notes/2015/the-runnables-20150903.html.

Source: Securities and Exchange Commission, Private Funds Statistics; iMoneyNet, Inc., Offshore Money Fund Analyzer; Bloomberg Finance L.P.; Securities Industry and Financial Markets Association: U.S. Municipal Variable-Rate Demand Obligation Update; DTCC Solutions LLC, an affiliate of the Depository Trust & Clearing Corporation: commercial paper data; Federal Reserve Board staff calculations based on Risk Management Association, Securities Lending Report; Markit Securities Finance; Investment Company Institute; Federal Reserve Board, Statistical Release Z.1, "Financial Accounts of the United States"; Federal Financial Institutions Examination Council, Consolidated Reports of Condition and Income (Call Report); gross domestic product, Bureau of Economic Analysis via Haver Analytics; Llama Corp, DeFiLlama.

Reliance on funding from uninsured deposits decreased for most banks, but reliance on other types of funding—less stable than core insured deposits—increased

Aggregate liquidity in the banking system remained sound, as HQLA measured relative to total assets was still at or above pre-pandemic levels at most banks (figure 4.2). Moreover, U.S. G-SIBs held, on average, 18 percent more HQLA than required by their LCR—the requirement that ensures banks hold sufficient HQLA to fund estimated cash outflows for 30 days during a hypothetical stress event—an amount that is a little below that of a year ago. Other banks that are required to meet minimum LCR requirements, those in Categories II and III, also continued to maintain a reasonable amount of HQLA above requirements, despite their HQLA levels being somewhat lower than a year ago. As of the end of the third quarter, banks in Categories I, II, and III had about 20 percent of HQLA booked in HTM accounts. Securities held in HTM accounts are accounted at book value when used in the calculation of regulatory capital and book equity, but they are valued for LCR purposes at fair value, and therefore fluctuations in the value of these securities will affect banks' LCR levels. HTM securities can be pledged at the Federal Reserve discount window or in repurchase agreements at their market value, but banks cannot sell any of those assets outright without allowing losses (or gains) on the whole HTM portfolio to flow through to equity.

Figure 4.2. The share of high-quality liquid assets to total assets remained above pre-pandemic levels
Figure 4.2. The share of high-quality liquid assets to total assets remained above pre-pandemic levels

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Note: The sample consists of domestic bank holding companies (BHCs), intermediate holding companies (IHCs) with a substantial U.S. commercial banking presence, and commercial banks. G-SIBs are global systemically important banks. Large non–G-SIBs are BHCs and IHCs with greater than $100 billion in total assets that are not G-SIBs. Liquid assets are cash plus estimates of securities that qualify as high-quality liquid assets as defined by the Liquidity Coverage Ratio requirement. Accordingly, Level 1 assets as well as discounts and restrictions on Level 2 assets are incorporated into the estimate.

Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding Companies.

During the March 2023 banking-sector stresses, high reliance on funding from uninsured deposits was a key vulnerability among some of the most affected banks, including those that failed. Since then, the share of uninsured deposits relative to total bank funding has decreased for most banks, especially at those that previously relied heavily on uninsured deposits. However, a significant portion of the decrease in funding from uninsured deposits was replaced by short-term nondeposit funding at large banks and by brokered and reciprocal deposits at regional and community banks. Most brokered and reciprocal deposits in the banking system are insured, but the stability of this type of funding during periods of stress may be lower than that of traditional core insured deposits. Banks' reliance on short-term wholesale funding increased further over the first half of the year and is concentrated at some of the very largest banks (figure 4.3). Although such funding can become expensive or unreliable during periods of market stress, the levels remain much lower than they were before the 2007–09 financial crisis, and post-crisis reforms, such as the LCR requirement, are intended to limit the spillovers from such an event.

Figure 4.3. Banks' reliance on short-term wholesale funding stayed low but increased further since 2023:Q4
Figure 4.3. Banks' reliance on short-term wholesale funding stayed low but increased further since 2023:Q4

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Note: Short-term wholesale funding is defined as the sum of large time deposits with maturity less than 1 year, federal funds purchased and securities sold under agreements to repurchase, deposits in foreign offices with maturity less than 1 year, trading liabilities (excluding revaluation losses on derivatives), and other borrowed money with maturity less than 1 year. The shaded bars with top caps indicate periods of business recession as defined by the National Bureau of Economic Research: March 2001–November 2001, December 2007–June 2009, and February 2020–April 2020.

Source: Federal Reserve Board, Form FR Y-9C, Consolidated Financial Statements for Holding Companies.

Money market funds and other cash-management vehicles remained susceptible to runs owing to structural vulnerabilities

Assets managed by MMFs increased since the April report to more than $6.25 trillion by the end of August, as MMFs continued to provide more attractive yields relative to most bank deposits, but at a slower pace than in 2023 (figure 4.4). More than 80 percent of those assets are in funds that only hold securities that are guaranteed by the U.S. government.

Figure 4.4. Assets under management at money market funds increased to an all-time high in August
Figure 4.4. Assets under management at money market funds increased to an all-time high in August

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Note: The data are converted to constant 2024 dollars using the consumer price index.

Source: Federal Reserve Board staff calculations based on Investment Company Institute data; consumer price index, Bureau of Labor Statistics via Haver Analytics.

Reforms for MMFs adopted last year by the SEC went fully into effect in October 2024. These reforms represent significant progress in making institutional prime and tax-exempt MMFs more resilient, although these funds remain vulnerable to runs in periods of significant stress. AUM in prime MMFs rose 7 percent year-to-date through August, as retail prime funds grew while AUM at their institutional counterparts declined significantly.

Other cash-management vehicles, such as dollar-denominated offshore MMFs and short-term investment funds, also invest in money market instruments and engage in liquidity transformation.16 Since the April report, estimated aggregate AUM of these cash-management vehicles increased further to $2.1 trillion, with between $0.75 trillion and $1.8 trillion of these vehicles' AUM being currently invested in assets that are similar to those in portfolios of U.S. prime MMFs.

Many of these cash-management vehicles—including retail and government MMFs, offshore MMFs, and short-term investment funds—seek to maintain stable net asset values that are typically rounded to $1.00. If short-term interest rates rise sharply or portfolio assets lose value for other reasons, the market values of these funds may fall below their rounded share prices and trigger large, concurrent redemptions, which can put the funds under strain and destabilize short-term funding markets.

Stablecoins grew substantially and remained vulnerable to runs

Stablecoin assets—digital assets designed to maintain a stable value relative to a national currency or another reference asset—grew substantially since the April report.17 The total market capitalization of stablecoins was more than $170 billion by the beginning of November, just a notch below the record high observed in April 2022 before Terra's collapse (figure 4.5). These digital assets are structurally vulnerable to runs and lack a comprehensive federal prudential regulatory framework. Stablecoins still have a relatively small footprint in the U.S. economy, but have experienced strong growth in recent years and have the potential to scale rapidly.

Figure 4.5. Market capitalization of major stablecoins grew significantly this year to near its previous peak
Figure 4.5. Market capitalization of major stablecoins grew significantly this year to near its previous peak

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Note: The key identifies series in order from top to bottom.

Source: Llama Corp, DeFiLlama.

Bond mutual funds' asset holdings increased in 2024

Mutual funds that invest substantially in corporate bonds, municipal bonds, and bank loans may be particularly exposed to liquidity transformation risks, given the relative illiquidity of their assets and the requirement that these funds offer daily redemptions. Mutual funds held approximately $1.3 trillion of corporate bonds as of the second quarter of 2024, which represents a sizable share—about 13 percent—of corporate bonds outstanding (figure 4.6). Total AUM of the subcategories of mutual funds holding high-yield bonds and bank loans, which primarily hold riskier and less liquid assets, edged up in recent months (figure 4.7). As significant investors in the bond and loan markets, substantial outflows from these funds or other disruptions in their ability to support the functioning of underlying markets can in turn lead to strains among the firms that borrow in these markets. In recent quarters, net inflows—which represent the net new funds available to borrowers—have been subdued (figure 4.8).

Figure 4.6. Corporate bonds held by bond mutual funds remained stable in the first half of 2024
Figure 4.6. Corporate bonds held by bond mutual funds remained stable in the first half of 2024

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Note: The data show holdings of all U.S. corporate bonds by all U.S.-domiciled mutual funds (holdings of foreign bonds are excluded). The data are converted to constant 2024 dollars using the consumer price index.

Source: Federal Reserve Board staff estimates based on Federal Reserve Board, Statistical Release Z.1, "Financial Accounts of the United States"; consumer price index, Bureau of Labor Statistics via Haver Analytics.

Figure 4.7. Assets held by bank loan and high-yield mutual funds moved up in the first half of 2024
Figure 4.7. Assets held by bank loan and high-yield mutual funds moved up in the first half of 2024

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Note: The data are converted to constant 2024 dollars using the consumer price index. The key identifies series in order from top to bottom.

Source: Investment Company Institute; consumer price index, Bureau of Labor Statistics via Haver Analytics.

Figure 4.8. Mutual fund flows were solid in early 2024 but have dissipated
Figure 4.8. Mutual fund flows were solid in early 2024 but have dissipated

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Note: Mutual fund assets under management as of September 2024 included $2,403 billion in investment-grade bond mutual funds, $268 billion in high-yield bond mutual funds, and $80 billion in bank loan mutual funds. Bank loan mutual funds, also known as floating-rate bond funds, are excluded from high-yield bond mutual funds.

Source: Investment Company Institute.

Central counterparties' initial margin levels and prefunded mutualized resources remained high and stable

Central counterparties' (CCPs) initial margin levels remained high and stable during the first half of 2024. CCPs also maintained high levels of prefunded mutualized resources. Elevated initial margins and ample overall prefunded resources work together to create a relatively low vulnerability at CCPs to a potential default by a clearing member or market participant.18 These two factors also reduce the possibility of large liquidity demands from a CCP to its credit providers (usually banks). Consistent with the high levels of initial margin and prefunded resources that they maintain, CCPs operated normally during the volatility spike in early August. Nevertheless, the concentration of clients at the largest clearing members is a vulnerability, because this concentration could make transferring client positions to other clearing members challenging if such a transfer were ever necessary.

Life insurers' reliance on funding from nontraditional liabilities remained higher than average

Over the past decade, life insurers have increased their reliance on funding from nontraditional liabilities, including funding-agreement-backed securities and cash received through repurchase agreements and securities lending transactions (figure 4.9). These liabilities can create liquidity risk through withdrawals or the inability to roll over funding if invested proceeds are not appropriately matched. The steady decline in the liquidity of life insurers' assets (figure 4.10), in conjunction with a greater use of nontraditional liabilities, makes it potentially more difficult for life insurers to be able to meet a sudden rise in withdrawals and other claims.

Figure 4.9. Life insurers' reliance on nontraditional liabilities for funding increased further in the first half of 2024
Figure 4.9. Life insurers' reliance on nontraditional liabilities for funding increased further in the first half of 2024

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Note: The data are converted to constant 2024 dollars using the consumer price index. FHLB is Federal Home Loan Bank. The data are annual from 2006 to 2010 and quarterly thereafter. The key identifies bars in order from top to bottom.

Source: Consumer price index, Bureau of Labor Statistics via Haver Analytics; Moody's Analytics, Inc., CreditView, Asset-Backed Commercial Paper Program Index; Securities and Exchange Commission, Forms 10-Q and 10-K; National Association of Insurance Commissioners, quarterly and annual statutory filings accessed via S&P Global, Capital IQ Pro; Bloomberg Finance L.P.

Figure 4.10. Life insurers continued to hold a significant share of risky and illiquid assets on their balance sheets
Figure 4.10. Life insurers continued to hold a significant share of risky and illiquid assets on their balance sheets

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Note: The data are converted to constant 2023 dollars using the consumer price index. Securitized products include collateralized loan obligations for corporate debt, private-label commercial mortgage-backed securities for commercial real estate (CRE), and private-label residential mortgage-backed securities and asset-backed securities (ABS) backed by autos, credit cards, consumer loans, and student loans for other ABS. Illiquid corporate debt includes private placements, bank and syndicated loans, and high-yield bonds. Alternative investments include assets filed under Schedule BA. P&C is property and casualty. The key identifies bars in order from top to bottom.

Source: Consumer price index, Bureau of Labor Statistics via Haver Analytics; Federal Reserve Board staff estimates based on data from Bloomberg Finance L.P. and National Association of Insurance Commissioners Annual Statutory Filings.

 

References

 

 16. Cash-management vehicles included in this total are dollar-denominated offshore MMFs, short-term investment funds, private liquidity funds, ultrashort bond mutual funds, and local government investment pools. Return to text

 17. To back the coins, stablecoins hold a pool of assets that, among other assets, contain a large amount of U.S. Treasury bills. Return to text

 18. Prefunded resources represent financial assets, including cash and securities, transferred by the clearing members to the CCP to cover that CCP's potential credit exposure in case of default by one or more clearing members. These prefunded resources are held as initial margin and prefunded mutualized resources, which builds the resilience of CCPs to the possible default of a clearing member or market participant. Return to text

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Last Update: November 25, 2024