2025 Hot Takes + Recap: Liquidity Edition
This time last year (January 26, 2024, to be exact), I took to LinkedIn to showcase my treasury expertise in the form of 5 industry predictions. Like a seasoned stock picker, I diversified across the risk/reward spectrum, tossing in some softballs and a couple of “I told you so” moonshots. Today, we’ll see if my 2024 picks played out more like a Jim Cramer Mad Money Special or a Pelosi Capital derivatives portfolio. After last year's recap, I'll sprinkle a few takes for this year to keep the fire hot.
Last Year’s Predictions From Lukewarm to Scalding Hot
1. Fed Will Let BTFP Die
Verdict: Win (1–0)
Yes, that nobody-asked-for-it-or-really-needed-it liquidity backstop officially bit the dust on March 11 last year. Technically, the shuttering was announced on January 24—two days before my post—but I promise you, that blog was sitting in my drafts before the Fed got around to making things official.
As you can see in the broad-shouldered “Batman graph”, banks quickly and preemptively loaded up on liquidity during the SVB fallout, took advantage of the BTFP’s low borrowing rate late in the year, and have been paying down those advances ever since. A bit of an overreaction on the Fed's part I must say.
2. Fed Will Try To Force the Discount Window Down Banks’ Throats
Verdict: Win (2–0)
If you’re one of the industry-leading, informed readers of my weekly newsletter (and if you’re not, you should be), you’d know how many OCC, FRB, and FDIC speeches in 2024 circled like a broken record, diplomatically begging banks to borrow from the discount window rather than letting the bank fail and forcing the FDIC to bail out their venture capital friends
They floated new limits and regulatory requirements
They promised and pinky swore to “de-stigmatize” it
They groveled for banks to preposition collateral and test out borrowing
But in the end, nothing actually changed. Hard to “de-stigmatize” a tool that still screams “Abandon ship!” the moment you use it. Below is a visual representation of a Bank Treasurer tapping the discount window for funding:
3. LCR Update Talks Start + Category 4 Banks Required to Report Again
Verdict: Loss (2–1)
I was really holding out hope for a renewed push on the Liquidity Coverage Ratio (LCR) both updating runoff/haircut rates and bringing it back as a requirement for Category 4 banks. This rumor seemed to gain a little traction in the liquidity community but it never manifested.
Why? Maybe the SVB meltdown’s postmortem showed that LCR compliance alone can’t save a bank from classic mismanagement. Or maybe the Fed figures it essentially enforces LCR through ILST for Cat 4 banks anyway. Either way, it’s a no-go for now.
4. Banks Will Fight Back Against Regulators and Get Some Wins
Verdict: Win (3–1)
IMO banks had been biting their tongues for a while, feeling like the regulators had been bullying them around with egregious oversight and unnecessary at best and conflicting or destructive at worst feedback. But the Supreme Court reversal of the Chevron doctrine was monumental. (For those who don’t spend their weekends reading legal briefs, the Chevron doctrine gave agencies broad leeway in interpreting ambiguous laws)
JP Morgan and the larger banks started a fuss last year with the FDIC DIF special assessment and continued to throw their weight around pushing back against Basel III, even getting bipartisan support (in an election year!!) to tone down the capital requirements or toss it out completely.
Those would have been enough for me to call this a good prediction, but the cherry on top came on Christmas Eve, when banks, the BPI, ABA, Chamber of Commerce, and others filed a lawsuit against the Fed challenging the opaque aspects of the stress testing framework.
5. A Novel Event Will Take Out a Significant (Enough) Bank
Verdict: Loss (3–2)
Well, this one was a big swing and a miss. Maybe a little wishful thinking for a little doomsday scenario leading to more job security. There were three U.S. bank failures, but they all followed the classic scripts of fraud or mismanagement—nothing spicy or “novel” enough to snag front-page headlines beyond the initial meltdown.
And Now... 2025's Boiling LRM Predictions!
1. Crypto/DeFi/Banks: A Big Partnership Moment
2025 is the year of DeFi/Crypto and a major partnership signaling the paradigm shift will be announced. Whether it's a major bank partnering to streamline cross-border payments, a clearinghouse accepting tokenized assets as collateral, or something as significant.
Distributed ledger technology is by definition a rent-seeking intermediary killer and this is the year that the intermediaries start to accept that and get on board, or resist and perish.
2. Nothing going down in the LRM
Who knows which regulatory bodies will even exist by the end of this year, let alone which regulations will pass or survive? With all the talk post-SVB it seemed 100% guaranteed a new liquidity regulation would be passed, but that environment couldn't have shifted further since. Any regulatory energy will be put toward Basel III, with stakeholders either trying to kill it once and for all or save face with a watered-down version that gets passed.
3. Consumer Credit, not CRE, Causes Recession
The CRE apocalypse has been all the rage for the last year, especially in the regional bank space. But either extend and pretend is working or we'll see the world crumble in the near future.
The next big liquidity risk driver will come from consumer credit risk. Between the stock market overvaluation growing, home prices continuing to the moon, and unemployment being historically low, the consumer is just feeling too damn good.
I went digging and found this interesting nugget on total unsecured consumer credit. Yes, it's the highest of all time (almost always is), but we appear to be starting to level off. The only other times that happen are those scary grey bars known as RECESSIONS.
Also, I did a tiny bit of analysis, looking at the monthly YoY growth rates of this data set. In the last 25 years, we've had periods of double-digit growth 3 times. The first was in 2000-2001 (for 9 months) and again in 2006 (for 11 months). Now it's a small sample size, but a year or two after those periods a non-medically induced grey bar appears above. The third period this happens is in 2022-2023 for... 20 MONTHS! AND the growth rates hit and stayed at 15% for 6 of those months, the largest rate in the other two cycles was 15%. That 5-minute Excel exercise was enough to convince me of hot take #3.
I'll see you back next year when my DeepSeek AI agent will automatically create a propaganda-free article for me while I'm living my best crypto-rich life in the US tax haven better known as Puerto Rico. Until then, feel free to reach out with anything liquidity risk-related and I'll be happy to help. Cheers.