RBA Shifts to Ample Reserves Setup Despite Shrinking Banking System Funds

Australia's Reserve Bank says that despite a significant drop in banking-system reserves since 2022, there is still more cash in the system than banks need. The Reserve Bank of Australia (RBA) has shifted to an 'ample reserves' setup.

This setup means that during the pandemic, the RBA bought assets which pumped extra reserves into banks' accounts at the central bank. As those holdings mature and roll off, reserves keep shrinking, according to David Jacobs, the RBA's head of domestic markets.

The short-term repurchase agreement (repo) funding, collateralized overnight loans, is still cheap, and banks' use of the RBA's new full-allotment operations remains modest. These operations lend reserves against collateral in whatever size the market needs, at a rate close to the cash rate target.

The takeaway is that reserves are still being set mainly by the unwind of pandemic settings, not by a new equilibrium where banks compete for scarce central-bank money. The RBA wants a system where it can keep overnight rates close to target by supplying reserves on demand.