Williams suggests tokenized repos could reduce bank reserve demand by improving intraday liquidity management.
“A deep and liquid intraday market might enhance collateral management and reduce some frictions in managing intraday liquidity, which could reduce banks’ demand for reserves for payment purposes.”
Williams reports banks say instant 24/7 payments and stablecoins could increase their demand for reserves.
“Respondents widely noted that movement toward instant 24/7 payments could increase their demand for reserves, and some also indicated that greater adoption of payment stablecoins could have similar implications.”
Williams warns modest reserve declines could cause substantial overnight rate increases and market disruptions based on steep demand curves.
“This implies that banks would have to see large increases in overnight rates to be willing to shed modest amounts of reserves—or, conversely, that a modest decline in reserves could induce a substantial increase in overnight rates.”