Bob Dylan turns 85 next month and is still performing for large audiences. More than 50 years ago, when he sang about shelters from the storm, he probably did not have the dollar's reserve status or the Federal Reserve’s balance sheet in mind as a shelter. But the Fed is a bank treasurer’s shelter from the storm. The nominee to take Chair Powell’s seat when his term ends next month wants to shrink it, and this month’s newsletter and chart deck discuss how he plans to do so.

With everything happening — the war, political uncertainty, Fed uncertainty, market volatility, tech issues, and now NDFIs getting in trouble — it's understandable if bank treasurers feel like they're in a bad dream. But it's real and only adds to the complexity they face when trying to figure out liquidity and asset-liability management in the context of instant payments. They also appreciate the shift in tone from bank supervisors who are committed to making their jobs easier, though they still need to understand their evolving landscape as consolidation accelerates and new entrants, including industrial loan companies and stablecoin-issuing fintechs, reshape the competitive environment.

Is the President’s nominee to chair the Fed a hawk, a dove, or some other kind of bird? On safari this month, your editor in chief had many different species to consider while weighing the nominee’s positions on fighting inflation, the Fed’s balance sheet, and independence. There was much more to think about than some baby zebra or wilderbeest’s life and death struggles against a cheetah in the Serengeti. In a land of the survival of the fittest, thanks to great cellular service, who could ignore the life and death struggles of our bank treasury subscribers, who now need to worry about the stablecoin-issuing trust banks and industrial loan companies that the OCC and FDIC just approved. Then there was the small Business Administration news that it is making it easier to form Small Business Investment Companies, Then there was the Miki Bowman news on regulatory capital changes for mortgage loans and mortgage-servicing assets. And, if that were not enough news to keep your editor in chief focused on work on his vacation, merger mania continued and a small community bank failed.

It is always End Times in the bank treasury world, but bank treasurers just soldier on. As this month’s newsletter discusses, bank treasurers face unprecedented uncertainty, are ever more challenged by fintechs and nonbank financial institutions (NDFIs) trying to muscle in on their traditional business, are still struggling to manage liquidity with their bond portfolios still deep underwater, and they are worrying about stablecoins and how they could potentially disintermediate them from their deposit funding. The Fed faces an unprecedented assault on its independence, while officials cannot even agree on the right course for monetary policy.

AI is the future, and the future is now, at least it is one of next year's top priorities for every bank treasurer at large and small banks and credit unions. The question is how? How do you implement AI? The answer to that question is another question: what do you want to do with it? Answering that question is not the IT department's or the intern's responsibility. The use cases need leadership at the top to decide and see implementation through if pilot projects are ever to yield the productivity gains the technology promises.

Now that the U.S. Mint stopped making pennies, repo traders will need to find some other coin to pick up in front of a steamroller. Meanwhile, bank treasurers cannot help but notice the growing volatility in the repo market, with SOFR frequently spiking above the rate on the RRP. The Fed is undoubtedly taking the stresses in the market seriously and announced that it would end QT next month. But notably, QT had a limited impact on reserve balances compared to the Government shutdown.

Connecting the dots is an age-old pastime, but the dots that bank treasurers see these days are very confusing and challenging to connect, at least without some form of AI. Even the voting members of the FOMC are not sure what picture they see. Amid significant market volatility and economic uncertainty, bank treasurers are just trying to keep their eyes on the horizon and keep their net interest margins steady.

It has been two and a half years since the regional bank failures, and Congress has not done anything to fix deposit insurance. The FDIC published a report on May 1, 2023, detailing the options before Congress for deposit insurance reform, but none of the choices are without tough tradeoffs. The public wants higher deposit insurance coverage, but that choice means banks will pay higher deposit insurance premiums, and higher premiums mean less profit. Congress needs to vote, and its vote is overdue. The last time Congress voted on deposit insurance to increase the cap to $250,000 was fifteen years ago.

Bank treasurers remain wary of stablecoins, but there is good news and bad news. First, the bad news is that instant payment systems, where volumes are growing by leaps and bounds and which stablecoins are one type, are going to increase the mix of low-yielding HQLA that banks will need to hold on their balance sheets, to the detriment of their NIMs. The good news is that first, no one in their right mind sits in cash, so the risk to deposits seems overdone. But the even better news is that global cross-border payment flows neared $1 quadrillion last year, and the average size of a single payment is often over $50 million, well beyond what other instant payment methods like FedNow and RTP typically handle, and thus an excellent use case for stablecoins. The beauty of these coins from an issuer’s perspective is that they are managed off-balance sheet by a third party, while the issuer earns 100% of the interest generated from the assets it places in the reserve fund until the holder cashes the token.

Bank treasurers may not like accounting, but they know that debits and credits always matter in a financial transaction. That is why it does not take a GENIUS Act to appreciate the economic opportunities Congress gave the financial industry this month. Instead, it requires accounting and an understanding of how debits and credits work in its favor. Basic accounting common sense also helps explain why the Fed can never return to the balance sheet it once had before the GFC and can never revert to the days when the law prohibited it from paying IORB, despite political calls to the contrary.