The financial system's 'plumbing' — the repo markets, overnight lending, and funding mechanisms — can break even when headline indicators look fine. Monitoring plumbing stress lets you catch problems early.

SOFR vs IORB Spread:

• SOFR (Secured Overnight Financing Rate): What banks actually pay to borrow cash overnight (secured by Treasuries)
• IORB (Interest on Reserve Balances): What the Fed pays banks to park reserves

Normal: SOFR ≈ IORB (± 5 bps). Cash is abundant; no one scrambles.

Stress: SOFR > IORB (positive spread). Banks are paying MORE than the Fed offers to get cash. Something is clogged — there's a shortage somewhere.

The September 2019 Lesson:

On September 17, 2019, the repo rate spiked to nearly 10% (from ~2%). SOFR surged. Banks couldn't find enough reserves. The system was breaking during 'normal times' — no recession, no pandemic.

What caused it? Reserves had gotten too low (QT), and Treasury settlement dates coincided with corporate tax payments. The 'pipes' were clogged.

The Fed emergency-injected liquidity and eventually started buying T-bills. QT effectively ended.

SLOOS (Senior Loan Officer (SLOOS) Opinion Survey):

The Fed surveys banks quarterly on:

• Are you tightening or loosening lending standards?
• Is loan demand rising or falling?

Why SLOOS Matters:

SLOOS measures if credit is actually being CREATED, not just if liquidity exists. Even with abundant reserves, if banks are scared and tightening standards, credit doesn't flow.

SLOOS above 40% net tightening has preceded every recession since 1990. It's one of the most reliable leading indicators.