Why Are Banks Using The Fed's SRF?

 Banks are repeatedly using the Fed's Standing Repo Facility (SRF) recently, ie borrowing overnight funds directly from the Fed against Treasury or mortgage repo.  While such liquidity management moves are not uncommon, per se, the question arises: why and why now?

The most common answer is that financial institutions must balance their books around quarter and year end, so such moves are nothing to worry about. Sure.  But the question remains: why do (some?) banks need to go to the FED for such liquidity, why can't they get it in the normal way through the interbank market?

Some facts:

1. The size of the US interbank overnight market is around $170 billion.

2. Recent SRF volume varied between $25-50 billion. That's actually a very large chunk of the market, meaning that market liquidity is significantly constrained. 

Where is the money going? Some point out that the government is issuing a lot of T-bills recently thus draining more liquidity than normal. Maybe. But this money goes right back into the system by paying obligations, it doesn't just sit in government accounts.

Or, are interbank credit conditions tightening? In other words, the liquidity is there but (some?) banks and/or other financial institutions are having trouble accessing it in the interbank market. Could it be that there are counterparty issues out there? We'll find out soon enough, I guess, but Jamie Dimon's comment about cockroaches comes to mind.

There's a serious complication these days: shadow banking aka private credit. These are non-bank institutions who have become major players in global credit markets but operate with minimal supervision from central banks and other authorities.  The size of this market has gone from $1 trillion in 2020 to an estimated $3-4 trillion today, narrowly defined. Having a bit of experience in this area I can definitely say that loan standards are nowhere near those of regular banks, and credit terms are much closer to junk/subprime levels. 

The problem with such lending is that it often creates its own death spiral: private credit lenders believe that they lower risk by using diversification, but that's just lending to a lot of low credit borrowers. And charging them much higher interest rates just hastens their demise when things get tough.

We are in a troublesome K-shaped economy - and I bet that shadow banking is lending mostly to the lower part of the K.