Almost 10 months ago, I wrote the article “MOUNTING SIGNS OF LIQUIDITY PROBLEMS AMONG LARGE US AND UK BANKS” to highlight several elements pointing toward a buildup of liquidity problems in the banking sector. Three elements were particularly noteworthy at the time:
- An unusual spike above $2 billion in the amounts borrowed from the Fed’s Standing Repo Facility.
- A significant increase in the amounts borrowed from the BOE through the Short-Term Open Market Operation (ST-OMO) facility.
- Warren Buffett aggressively dumping his Bank of America shares.
Last week, something very interesting happened again: banks borrowed $11 billion from the Fed through the Standing Repo Facility on the last day of the quarter. Not only was the amount large and caught many by surprise, but the banks borrowed from the Fed in two tranches:
- ~$5 billion before the U.S. stock market cash trading opened.
- ~$6 billion during the afternoon 1:30 p.m. window, the customary one.
Here’s where things get very interesting because, unlike 10 months ago, banks needed liquidity before the last trading day of the quarter began. Why? The shift to pre-market borrowing from the Fed’s Standing Repo Facility (SRF) reflects a confluence of structural liquidity pressures and regulatory timing constraints facing large banks:
Aggressive Treasury Issuance Straining Liquidity
The U.S. Treasury’s massive quarterly borrowing ($514 billion in Q2 2025 and $554 billion projected for Q3) flooded markets with new securities. Banks, especially primary dealers, faced pressure to absorb these issuances but were constrained by quarter-end regulatory capital and leverage ratio windows. The pre-market drawdown suggests banks anticipated collateral scarcity and sought liquidity upfront to meet settlement obligations without breaching intraday limits.
Private Credit Interconnections Amplifying Demands
Bank lending to private credit vehicles (e.g., BDCs, private debt funds) surged to $95 billion in commitments by Q4 2024, with $56 billion utilized. These credit lines often include quarter-end “equity bridge” drawdowns for fund deployments. Banks likely tapped the SRF early to cover anticipated draws from private credit borrowers, avoiding afternoon congestion when multiple funding needs converge.
Commercial Real Estate (CRE) Distress Peaking
FDIC data shows past-due non-owner-occupied CRE loans hit 4.65% at large banks—the highest since 2014. Banks likely anticipated CRE workout costs or collateral haircuts as loans matured at quarter-end, requiring early liquidity to cover potential charge-offs without alarming depositors.
The pre-market tranche of $5 billion reflects defensive liquidity insurance against intraday uncertainties: collateral re-rating, deposit outflows, or private credit draws. The afternoon tranche of $6 billion then likely addressed residual needs after market conditions crystallized. This bifurcation signifies a strategic shift from reactive to anticipatory liquidity management, driven by cumulative systemic friction and liquidity tightness. Clearly, what we just observed bears signs of significant stress in the financial system, especially the money market, a stress not unique to the U.S. but already evident in other countries, particularly the UK. Just a few days later, on Thursday, the amount of GBP borrowed by banks and financial institutions from the BOE through the ST-OMO reached another all-time high of £72.4 billion.
While we no longer know in real time whether Warren Buffett is trimming his stake in Bank of America further, since he now holds less than 10% of the shares, 10 months later, the red flags I first raised are now even more glaring. What we do know is that central banks and regulators are growing concerned about the liquidity of banks’ balance sheets and the potential losses banks will face in the event of forced liquidation of those assets. However, instead of actively addressing the problem, regulators are effectively enabling banks to carry on with what they’re doing, considering the current situation not worthy of requiring banks to increase capital in case of distress, as we discussed last week in “2025 FED STRESS TEST REVEALS HOW TODAY’S FED IS COMPLICIT IN HIDING BANKS’ PROBLEMS”.
Here’s the thing: everyone on Wall Street is now taking for granted that the Fed will cut rates at least twice this year, although what they’re failing to recognize is that this move won’t necessarily mean medium- and long-term yields will come down, as I correctly predicted almost one year ago in “IF THE FED CUTS RATES, THE DAMAGES WILL BE FAR GREATER THAN THE BENEFITS”, and I was a lonely voice in doing so. Furthermore, many central banks like the BOE, ECB, or SNB, which started cutting rates ahead of the Fed, are effectively close to, if not already at, the end of their rate-cut cycles because further moves lower will surely exacerbate the inflation problem that is still far from being tamed (unless you believe in the completely unrealistic metrics broadcasted by public data agencies).
Considering how all major countries, starting with the U.S., are planning significant deficit spending for the years to come and funding it with incremental debt, it’s pretty much assured that medium- to long-term yields will resume moving higher, and likely by a lot, soon. How will this impact banks? Of course, the hundreds of billions of USD in “paper losses” already present in the hold-to-maturity books are going to grow. Regulators can choose to continue ignoring those related to government debt under the dangerous assumption that banks won’t be forced to sell those at a loss before maturity and that various countries will repay them in full. However, what they won’t be able to ignore are losses in non-government debt, especially those related to real estate lending, private equity, and other NFBIs.
Beware: the nightmare of central banks and regulators isn’t clearly an increase in yields per se, but a credit event. We’ve already come very close to that three times in this crazy post-COVID market cycle: first with the UK pension crisis in 2022, then with the U.S. regional banks crisis and Credit Suisse implosion, and last year in August with the near-implosion of the JPY carry trade’s multi-trillion USD house of cards.
The chances of a credit event are rising significantly the longer the can is kicked down the road, which is why I suggest staying laser-focused on unusual spikes and timing patterns in borrowing from central bank facilities, particularly the Fed’s Standing Repo Facility (SRF) and the BOE’s Short-Term Open Market Operation (ST-OMO), focusing on magnitude (e.g., $11 billion SRF draws, £72.4 billion ST-OMO), intraday timing anomalies (e.g., pre-market borrowing), and persistence beyond quarter-ends. When this starts to occur, it will be time to run away from risk assets altogether because, at that point, real troubles will be hitting the fan. Considering how much money central banks have printed so far to keep this house of cards standing, it’s very dangerous to assume they can massively increase the size of their balance sheets once again without triggering a total implosion of the modern fiat monetary system.
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