Recently the FED released its H4 recently which bears some interesting insights into the state of the US banking sector.

The Reverse Repo facility has been squashed since May while the bank reserves have remained relatively stable.

Chart 1: RRP vs Bank Reserves

We are not at all surprised by the banks’ continued caution throughout the summer, and we expect this risk-averse attitude to persist in the coming quarters.

The banks are operating under the assumption that there is a significant probability that the risk profile of existing loan portfolios worsen as the economy cools (or worse). As a result, most banks are ramping up their respective ALLL estimates