The Overnight Money Warning

What the repo market is telling us about bank liquidity and why it matters

I know I have been writing a lot about regional banks lately (and said I’d stop). The thing is, we’re tied at the hip with the banking industry, and I am trying to make sense of an incredibly confusing market. On the surface, things look calm. Underneath, I continue to see small cracks.

Part of my job at B:Side is to stay ahead of those cracks. The more we understand the pressure points, the better partner we can be to our banks. One signal I watch closely is the repo market, the market for overnight money. Most people never think about it. When it moves, it often means something important is shifting.

And right now, it’s moving a lot.

Photo by Adam Nir on Unsplash

What is This Repo You Speak Of?

A repurchase agreement, or repo, is the most basic kind of loan in finance. A bank that needs cash sells a Treasury bond or a mortgage-backed security to another institution and agrees to buy it back the next day for a little more. The tiny markup is the interest for one day.

The entire market runs on that simple trade.

The Federal Reserve also runs a backstop called the Standing Repo Facility or SRF. If funding gets tight, eligible banks can bring Treasuries or agency MBS to the Fed and get cash overnight at a fixed rate. This keeps the system from locking up.

When banks tap the SRF a lot, it means they prefer to borrow from the Fed rather than from each other. That’s not panic. It’s stress.

A reverse repo is the mirror image from the Fed’s side. The Fed takes cash and gives securities for a day. It’s how the Fed drains excess cash from the system.

The SOFR Minus IORB Spread, A Quiet Warning

Two acronyms matter here.

• SOFR is the Secured Overnight Financing Rate, the key rate for overnight borrowing backed by Treasuries.

• IORB is the Interest on Reserve Balances, the rate the Fed pays banks on cash that sits at the Fed.

Normally, SOFR trades at or below IORB. That’s the healthy state of things. A bank can earn IORB risk-free, so there’s no reason to borrow more expensively overnight.

But that’s not what’s happening right now. The SOFR minus IORB spread has jumped to roughly 0.30%, its widest level in years. That means banks are paying 30 basis points more to borrow cash than they’d earn just leaving it parked at the Fed.

That might sound like a rounding error, but in a market this large, it’s a blaring siren. It means cash is scarce and trust is fading. It looks a lot like late 2019 and early 2023, when similar spikes in funding costs foreshadowed deeper banking stress.

How We Got Here

Three main forces met at once.

First, the Fed’s balance sheet reduction—quantitative tightening, or QT—finally hit the point where it matters. Since 2022, the Fed has been shrinking its balance sheet by letting bonds mature without replacing them. For most of that time, the drain came from cash parked in the Fed’s reverse repo facility, which was painless. But now the drain is coming from bank reserves, the cash banks use to function day-to-day. That’s when things start to tighten.

Second, the Treasury has been issuing a flood of new bills. Each auction settlement day pulls cash out of banks and dealers and into the Treasury’s account at the Fed. In normal times, that’s a non-event. With reserves running low, it adds strain.

Third, the end of October brought the usual month-end squeeze. Banks and dealers trimmed lending to make their books look smaller for regulatory reporting just as others needed cash.

These three would have been enough on their own. But a fourth factor is now making everything worse.

The Shutdown Effect

The ongoing government shutdown, now expected to last into December, has quietly deepened the liquidity crunch.

When the government stops spending, the U.S. Treasury’s cash balance builds up in its own account at the Fed, known as the Treasury General Account or TGA. That money just sits there, unavailable to the banking system.

Right now, that balance has surged past $1 trillion, the highest since 2021. Every dollar in that account is a dollar that isn’t circulating through banks, deposits, or money markets.

The result is simple and painful. The Treasury’s growing cash pile is pulling liquidity out of the private sector at the same time the Fed is trying to shrink its balance sheet. Together, they’ve pushed Fed reserves down to about $2.85 trillion, the lowest level in nearly four years.

Foreign banks have felt it too. According to the Fed’s data, their U.S. cash assets have fallen by more than $300 billion since midsummer. Less foreign liquidity means fewer repo lenders and higher costs for everyone.

This combination has created a self-reinforcing loop. Tight conditions lead banks to hoard cash. Hoarding drains more liquidity from the market. Each turn of the loop tightens funding a little more. The Fed’s goal now is to stop that loop before it spins out.

The Numbers That Tell the Story

By the end of October, the stress was plain in the Fed’s own data.

• On October 31, banks borrowed $50.35 billion from the SRF—the largest one-day use since the facility opened in 2021.

• On the same day, another $51.8 billion in cash sat idle in the Fed’s reverse repo window.

• In the first three days of November, banks took another $44 billion in SRF loans.

When the Fed saw how fast reserves were falling, it quietly announced that QT will end on December 1st. That’s as close as the Fed comes to waving a red flag.

What Regional Banks are Showing

You can see the strain in regional bank stocks. The SPDR S&P Regional Banking ETF (KRE) closed October near 61 and fell toward 58, a level that mattered in 2023. On November 3, most of the big names—M&T, Zions, Truist, Synovus, First Horizon, Huntington, Flagstar, Regions, and Citizens—were down between 0.8% and 2.4% intraday.

Part of that is credit-related; bad loans, commercial real estate, and a few governance issues. But part of it is funding. As overnight borrowing costs rise, smaller and mid-size banks feel it first. They conserve cash. They raise rates. They lend less.

If KRE can hold above 58, markets may calm down. If it breaks lower, expect more defensive behavior across the system.

What the Fed is Trying To Do

The Fed wants policy tight enough to finish the inflation fight but smooth enough to keep the overnight market functioning.

Ending QT stops the drain on reserves. Keeping the Standing Repo Facility open ensures banks always have a safe source of liquidity. The Fed can also tweak the rate it pays on reserves or adjust the size of its operations if needed.

This isn’t stimulus. It’s maintenance. The goal is to keep the gears turning without flooding the system again.

What it Means for Banks and Businesses

For banks, funding that used to be routine is now work. Month-end and Treasury settlement days are the pain points. When SOFR trades above IORB, it shows up in intraday volatility and higher costs. Staying liquid takes planning—keeping collateral ready, pre-funding early, and communicating clearly about pricing.

For businesses, the signal is just as clear. You don’t borrow in the repo market, but your lender does. When their costs rise, yours will too. Expect slower approvals, tighter terms, and a renewed focus on credit quality. Keep a backup line open. Ask your bank what they’re seeing. It’s not prying—it’s prudence.

The Bigger Picture

The system isn’t broken, but it’s under strain. The Fed’s tightening campaign, the Treasury’s growing cash balance, and the ongoing government shutdown have all combined to squeeze liquidity just a little too far. That’s why repo rates are jumping and why the Fed is stepping in quietly to keep things stable.

What comes next will depend on two things: how long the shutdown lasts and how quickly funding markets normalize once it ends. When the Treasury starts spending again, some of that trapped cash will flow back into the system. Until then, conditions will stay tight.

For now, it’s a time for discipline, not panic. Watch the right signals, keep relationships strong, and plan for slower movement in credit and capital.

I follow these indicators not because they predict the future, but because they give some indication where we might be in the cycle. And right now, they’re saying the same thing: liquidity is thinning, confidence is cautious, and we’re closer to the edge of the tightening phase than the beginning.

The noise will pass, as it always does. But the lesson is the same—stay aware, stay ready, and never take the flow of money for granted.