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.”
Williams says banks cite liquidity regulation changes and 24/7 payments transition as key drivers of reserve demand.
“Banks cite changes to liquidity regulations, as well as shifts in liquidity management amid the transition toward 24/7 payments and the adoption of payment innovations, as important drivers of their preferred levels over the next two years ( Panel 11 ).”
Williams argues specific market factors shifted the reserve demand curve downward rather than indicating reserves left ample range.
“I interpret the remaining factors (seasonally low bill supply, increased dealer repo intermediation capacity, reduced repo financing demand, and a temporary increase in government-sponsored enterprise [GSE] repo investment activity) as ones that induced a downward shift in the reserve demand curve.”
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.”