Bank for International Settlements Quarterly Review, 2014, “Non-US banks’ claims on the Federal Reserve”—Robert Mcauley and Patrick McGuire.
Dudley, Wiliam, 2014, The Economic Outlook and Implications for Monetary Policy. Remarks before the New York Association for Business Economics, New York City, May 20. http://www.newyorkfed.org/newsevents/speeches/2014/dud140520.html
Feroli, Michael, Anil K Kashyap, Kermit Schoenholtz, and Hyun Song Shin, 2014, “Market Tantrums and Monetary Policy,” February 28. Prepared for the 2014 U.S. Monetary Policy Forum.
Gagnon, Joseph E, and Brian Sack, 2014, “Monetary Policy with Abundant Liquidity: A New Operating Framework for the Federal Reserve,” Peterson Institute of International Economics, Policy Brief # 4-4, January.
Copeland, Adam, Isaac Davis, Eric LeSueur, and Antoine Martin, 2012, “Mapping and Sizing the U.S. Repo Market,” Liberty Street Economics, New York Fed, June 25.
Singh, Manmohan,, 2013b, “The Economics of Shadow Banking,” presented at Reserve Bank of Australia’s Liquidity and Funding Conference, Sydney, August.
Stein, Jeremy, 2014, Incorporating Financial Stability Considerations into a Monetary Policy Framework, speech at the International Research Forum on Monetary Policy, Washington, D.C., March 21.
Tarullo, Daniel K., 2013, “Shadow Banking and Systemic Risk Regulation,” At the Americans for Financial Reform and Economic Policy Institute Conference, Washington, D.C., November 22.
The author would like to thank Stijn Claessens, Karl Habermeier and several colleagues at the IMF for their input. The paper has benefitted from discussion with market participants. Earlier version(s) were presented in Brussels (Euroclear’s Central Bank Workshop and ICMA’s Repo Conference) and at AIMA’s conference in New York.
Incorporating Financial Stability Considerations into a Monetary Policy Framework, Board of Governors of the Federal Reserve System, March 21, 2014.
Also, via Governor Tarullo (speech, November 22, 2013): “The banks and broker dealers, in turn, use reverse repo to provide more than $1 trillion in financing to prime brokerage and other clients.”
Reserve Bank of Australia’s Committed Liquidity Facility (CLF) allows firms that do not have access to HQLA to remain short of their arithmetic requirement, and pay a penalty in line with their shortfall. Thus, there is no use of RBA balance sheet assets but the penalty provides a promise to receive HQLA during crisis in lieu of sub-HQLA at mark to market prices. However, at present, there is no facility that caters to shortfall stemming to meet good collateral needs for posting at CCPs.
Central clearinghouse or CCPs must hold immediately available wealth – let’s call that ‘deposits.’ By giving the CCPs direct access to the Fed, those deposits come off the balance sheets of the major banks, freeing up bank capital for more non-depository purposes. This is part of the same ‘short-circuit’ via the Reverse Repo program—the Fed is expanding the universe of deposit-takers that have direct access to its balance sheet.
RONIA is the Repurchase Overnight Index Average. This index tracks actual market overnight funding rates. Gilt repo rates have not gone negative, excepting December 31, 2013 when a government levy on banks’ balance sheets has an unexpected and disorderly impact on funding conditions over the year-turn
How many institutions are eligible to hold reserve deposits at the Fed, how big do they want their balance sheets to be, how much do they want to hold in short-term assets, and what are they holding now? How many institutions are eligible to do reverse repo at the Fed, how big do they want their balance sheets to be, how much do they want to hold in short-term assets, and what are they holding now? (Fannie and Freddie are noteworthy here) What’s the overlap between the two? It’s all about the marginal substitution between one and the other.
If RRP moves to longer tenor (e.g., one week, three months or longer), there will be additional collateral velocity generated as banks will have more flexibility of switching RRP into Triparty—see Figure 1.
See New York Times March 21, 2014, New York Fed Chief Expresses Concern on New Leverage Rule” (and reference to New York Fed President Dudley raising the possibility that the SLR rule could inhibit the Fed’s ability to conduct monetary policy)
Interesting, the recent BIS Quarterly (March, 2014) shows that there may have been a US$1trillion demand for U.S. dollars by non-U.S. banks stemming from swapping euro, yen, sterling. Foreign bank branches held US$0.96 trillion of the US$2.25 trillion in reserves at the Fed as of end-2013; or about 43 percent of the total reserves. Foreign bank branches are not levied any FDIC fee on the size of their US balance sheet. Thus foreign bank branches receive 25 bps interest on reserves; U.S. banks receive 25 bps minus FDIC fee (that is proportional to the size of the balance sheet). However, it is not easy to disentangle how such swaps were converted to U.S. dollars and the intermediate steps (or, collateral chains involved).
From Dudley’s speech: “Also, with an exceptionally large balance sheet there will be considerable attention on the methods that the FOMC will likely use in order to exert control over the level of short-term rates.”