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Update — October 2025:

US bank reserves continue to fall - hitting a four-year low as liquidity fears surge. Fresh Fed data shows reserves have plunged to about $2.8 trillion, down from $3.5 trillion earlier this year - the lowest since 2021.

Meanwhile, several regional banks such as Zions Bancorp and Western Alliance have begun showing early signs of liquidity stress as banks tapped the Fed discount window for money, validating concerns about tightening systemic liquidity outlined below.

Key Takeaways:

• Bank reserves are shrinking fast: Down nearly 12% in three months — one of the sharpest post-2008 declines.
• Liquidity can vanish quickly: Even “ample” reserves can evaporate when confidence cracks.
• Three drains at play: Treasury deficits, quantitative tightening, and an empty reverse repo facility.
• Regional banks remain fragile: Still sitting on ~$400B in unrealized losses.
• Margin for error is thin: Reserves now hover just below the 10% of GDP “comfort zone.”

“Follow the money,” they say. If it’s flowing, the system chugs along. If it dries up, things grind to a halt.

Well, right now, U.S. bank reserves - the deposits banks keep parked at the Fed - are shrinking fast. And it’s one of the biggest risks flying under the media’s radar.

It may sound like abstract numbers and dull “monetary” plumbing (it is). But it really does matter.

Because the last time reserves dropped this low was January 2023 - just two months before Silicon Valley Bank imploded and set off a regional banking panic.

Sure, on paper, reserves still look plentiful at roughly $2.95 trillion. A big number, yes. But measured against GDP? That’s less than 10% - far less impressive and historically a warning level.

But the pace of the fall is what worries me – with reserves down nearly 12% since mid-July. That’s one of the sharpest drops in the post-2008 era.

Figure 1: St. Louis Federal Reserve, Dunham, October 2025

History shows how quickly “ample” turns fragile.

For example - in September 2019 - the Fed overtightened, reserves slipped too far, and repo markets blew up almost overnight. Banks stopped lending, rates spiked, and the Fed briefly lost control of overnight funding markets¹.

Then in 2023, thin liquidity buffers once again exposed the fragility of regional banks.

This is why reserves matter - even if hardly anyone else is watching.

They’re the hidden plumbing of the financial system. When the pipes are full, everything flows. But when the pressure runs low, problems appear fast.

And right now, pressure is dropping fast. . .

Understanding Bank Reserves and Their Role in Liquidity

Bank reserves are the deposits commercial banks keep at the Federal Reserve - essentially the banking system’s transaction account. They’re used to settle payments between banks.

• When your deposit moves from Bank A to Bank B, reserves move behind the scenes to balance it out.

They’re also one of the Fed’s main tools for monetary policy – for instance:

• Quantitative Easing (QE): The Fed creates money, buys Treasuries and other assets, creating new reserves - aka money flows into the pipes.
  
  
• Quantitative Tightening (QT): The Fed lets bonds roll off or sells them back to banks, draining reserves - aka money flows out.

Too much QE and the system floods (bubbles). And too much QT and the pipes rattle and break.

• When reserves fall too low, banks behave like people with declining checking balances - they hoard cash, cut back on spending/lending, and stress out.

Don’t Confuse Bank Reserves With Deposits

Again, reserves are not your checking account. They’re banks’ money at the Fed, moving only between banks when payments settle. Deposits are your money at the bank. They’re linked, but not the same.

• Learn more about systemic risks in our article on banking fragility.

But the point here is, deposits are what you see. And reserves are what keep the whole system flowing.

The “Three Drains” Behind the Declining Reserves

So, if reserves are the water pressure in the system, why is it starting to run low? That’s because of the unholy trinity.

1. Treasury Deficits

To finance chronic shortfalls, the Treasury issues mountains of new bonds. Investors and banks buy those bonds with cash that drains directly out of reserves. 

Put simply, the private sector gets the bond, and the government gets the cash.

And that cash goes into the Treasury General Account (TGA) - the government’s checking account at the Fed.

• Think of it like Monopoly. When you pay taxes to the bank, the money sits in the middle of the board - out of play until a card releases it. That’s the TGA. When it’s refilled, money leaves the system until the government spends it again.

Thus, government borrowing is pulling liquidity out of the system - and it’s happening today at a pace seen only a few times in history.

Back in July, the government said it would rebuild its TGA balance to $850 billion by the end of September². And the latest data shows that it’s already at $805 billion - nearly 2.7x the ~$300 billion level in mid-July.

Figure 2: St. Louis Federal Reserve, Dunham, October 2025

The point is, as the TGA rebuilds, each new bond sale pulls reserves lower.

2. Quantitative Tightening (QT)

After COVID, the Fed pumped an absurd amount of liquidity into the system to keep things flowing – more than doubling the size of its balance sheet (adding $5 trillion between Q1 2020 and Q2 2022). But all that cash helped fuel the worst inflation since the 1970s that Americans are still dealing with.

Thus, since summer 2022, the Fed has been doing the opposite. When bonds mature, instead of reinvesting, the Fed simply lets them roll off its balance sheet. That money just “evaporates,” and bank reserves shrink as the money disappears (this is what QT means)³.

From the mid-2022 peak, the Fed’s balance sheet is already down more than 26% (albeit the total balance is still far above pre-pandemic levels).

Figure 3: St. Louis Federal Reserve, Dunham, October 2025

The point is, as the Fed’s balance sheet declines – so will reserves.

3. Reverse Repo Drain

The overnight reverse repo facility (RRP) - aka the overflow drain that once held $2.4 trillion - is basically empty.

As of writing this, there’s barely $8 billion left.

• For more detail, see my article from last year, “The Overnight Reverse Repo Market Explained: Why Liquidity Is Drying Up.”

Figure 4: St. Louis Federal Reserve, Dunham, October 2025

For the past two years, that overflow lot acted like a buffer - soaking up excess liquidity like a sponge and helping keep bank reserves higher even as the Fed tightened and the Treasury borrowed like a drunken sailor.

But now that lot is empty. The sponge is dry. And that means every dollar of new Treasury borrowing or Fed balance sheet runoff no longer gets cushioned by the RRP and cuts into bank reserves.

How Low Is Too Low?

So, should we worry about falling reserves?

History says not yet. But I wouldn’t get comfortable.

Back in September 2019, the Fed learned the hard way what happens when reserves fall too low. Short-term rates spiked, liquidity froze up, and the Fed had to step in with emergency repo injections - supplying hundreds of billion per day just to keep funding markets stable. That squeeze wasn’t a single event but the result of multiple drains: corporate tax payments, the Treasury refilling its TGA, and years of QT.

Sound familiar?

That episode was a reminder of how quickly funding stress and a liquidity crunch can erupt once reserves slip below the comfort zone.

Today’s setup looks a bit less dire, but the foundations are shaky. Bank reserves are under $3 trillion — just 9.8% of GDP, slightly below the so-called comfort band.

Bank reserves below $3 trillion, or 9.8% of GDP – slightly below the so-called “danger zone.”

But that’s the problem. No one really knows where the danger zone truly is.

Some estimates put the stress floor near 8% of GDP (~$2.5 trillion), with 9–10% a more comfortable range. That leaves a little cushion currently - but not much⁴.

And remember - even the Fed thought it was fine in 2019, right up until it wasn’t.

But what makes today riskier is the speed of the drain.

With the RRP empty and the Treasury rapidly rebuilding its cash buffer, reserves can fall faster than expected. For example, a $250 billion swing in the TGA alone (hardly anything with how much the Treasury spends) could push balances down toward the 8% zone. Add in QT’s steady drip, and the cushion quietly erodes until markets suddenly notice - and by then, the stress is already in the system.

Sure, the Fed has tools to rebuild reserves if it overshoots. But pumping money into the system risks reigniting inflation. So it won’t move until the strain is undeniable.

Thus, the question is: how much pain must markets and banks endure first?

Why Regional Banks Are the Weak Link

As I’ve detailed, when liquidity runs thin, problems can surface - and regional banks are often the most vulnerable.

For instance, U.S. banks are still sitting on nearly $400 billion in “unrealized losses” on their bond holdings⁵.

What does that mean?

• Banks own a lot of bonds (like Treasuries).
  
  
• Those bonds have a book value (what the bank paid) and a market value (what they’re worth today).
  
  
• Because interest rates have risen, older low-yield bonds are worth much less on the market.
  
  
• That’s the $395 billion hole.

Figure 5: FDIC. August 2025

This isn’t a crisis itself - since as long as banks hold those bonds to maturity, they’ll still get paid back in full.

The problem comes if banks need cash fast. In a crunch (like if reserves get too low) or a bank run, they’d have to sell those bonds at steep losses.

And that’s exactly what sank various regional banks back in 2023.

Simply put, banks are sitting on big paper losses that don’t seem to matter. That is, until suddenly they do.

Final Thoughts

Liquidity problems don’t creep up - they hit hard and fast.

September 2019 was calm until it wasn’t. And SVB looked fine until it wasn’t.

Right now, reserves are still in relatively “comfortable” territory, but the cushion is thinning. And with the RRP overflow drain empty, the TGA climbing, and QT still underway - it wouldn’t take much to push the system closer to its stress floor.

If that happens, regional banks are likely the first to wobble since they rely more heavily on steady liquidity, and without the buffers of the giants, they’re more exposed.

Add in nearly $400 billion in unrealized bond losses, and the margin for error shrinks even further.

This doesn’t mean another crisis is around the corner. But it does mean the weakest links get tested first when reserves fall. And that’s why this story matters.

But as always, just some food for thought.

FAQ

Why are U.S. bank reserves falling in 2025?
A combination of Treasury deficits, quantitative tightening (QT), and a drained reverse repo (RRP) facility are pulling liquidity out of the system, leading to a sharp decline in reserves.

What level of bank reserves is considered safe?
No one really knows. But analysts suggest reserves below 9–10% of GDP can signal stress. In October 2025, reserves are already around 9.8%, dangerously close to the lower bound.

Could falling bank reserves trigger a crisis?
History shows liquidity can vanish quickly. Episodes like the 2019 repo crisis and the 2023 regional bank failures were preceded by declining reserves.

Which banks are most vulnerable?
Regional banks are more exposed due to lower liquidity buffers and significant unrealized bond losses, making them susceptible during liquidity crunches.

What actions can the Fed take if reserves fall too low?
The Fed could inject liquidity via repos or restart asset purchases, but such moves risk reigniting inflation—making intervention politically and economically sensitive.

Sources:

1. The Fed - What Happened in Money Markets in September 2019?
2. A Fragile Absorption: The 2025 TGA Refill and the New Liquidity Regime - Delphi Digital
3. Understanding Quantitative Tightening: How the Fed Reduces Market Liquidity
4. Should we worry about falling US bank reserves? | opinions | ING Think
5. FDIC Quarterly Banking Profile Second Quarter 2025

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