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44 posts on "Central Bank"September 29, 2021What Quantity of Reserves Is Sufficient?
A concern of the Federal Reserve is how to manage its balance sheet and whether, over the long run, the balance sheet should be small or large. In this post, we highlight results from a recent paper in which we show how, even during a period of “ample” reserves, the Fed’s management of its balance sheet had material impacts on funding markets and especially the repo market. We argue that the Fed’s “balance-sheet normalization” from March 2017 to September 2019—under which aggregate reserves declined by more than $950 billion—combined with post-crisis liquidity regulations, stressed the intraday management of reserves of large bank holding companies that are active in wholesale funding markets resulting in higher repo rates and spikes in such.
February 5, 2021Up on Main Street
The Main Street Lending Program was the last of the facilities launched by the Fed and Treasury to support the flow of credit during the COVID-19 pandemic of 2020-21. The others primarily targeted Wall Street borrowers; Main Street was for smaller firms that rely more on banks for credit. It was a complicated program that worked by purchasing loans and sharing risk with lenders. Despite its delayed launch, Main Street purchased more debt than any other facility and was accelerating when it closed in January 2021. This post first locates Main Street in the constellation of COVID-19 credit programs, then looks in detail at its design and usage with an eye toward any future programs.
Posted at 7:00 am in Bank Capital, Banks, Central Bank, COVID-19 Facilities, Credit, Federal Reserve, Financial Institutions, Financial Intermediation, Financial Markets, Fiscal Policy, Monetary Policy, Pandemic | Permalink | Comments (0)November 23, 2020Monetizing Privacy with Central Bank Digital Currencies
In prior research, we documented evidence suggesting that digital payment adoptions have accelerated as a result of the pandemic. While digitalization of payment activity improves data utilization by firms, it can also infringe upon consumers’ right to privacy. Drawing from a recent paper, this blog post explains how payment data acquired by firms impacts market structure and consumer welfare. Then, we discuss the implications of introducing a central bank digital currency (CBDC) that offers consumers a low-cost, privacy-preserving electronic means of payment—essentially, digital cash.
Posted at 7:00 am in Central Bank, Currency, Financial Intermediation, Household Finance | Permalink | Comments (0)October 19, 2020How Has Post-Crisis Banking Regulation Affected Hedge Funds and Prime Brokers?
“Arbitrageurs” such as hedge funds play a key role in the efficiency of financial markets. They compare closely related assets, then buy the relatively cheap one and sell the relatively expensive one, thereby driving the prices of the assets closer together. For executing trades and other services, hedge funds rely on prime brokers and broker-dealers. In a previous Liberty Street Economics blog post, we argued that post-crisis changes to regulation and market structure have increased the costs of arbitrage activity, potentially contributing to the persistent deviations in the prices of closely related assets since the 2007–09 financial crisis. In this post, we document how post-crisis changes to bank regulations have affected the relationship between hedge funds and broker-dealers.
Posted at 7:00 am in Bank Capital, Banks, Central Bank, Corporate Finance, Financial Institutions, Financial Markets, Regulation | Permalink | Comments (0)October 2, 2020Should Emerging Economies Embrace Quantitative Easing during the Pandemic?
Emerging economies are fighting COVID-19 and the economic sudden stop imposed by lockdown policies. Even before COVID-19 took root in emerging economies, however, investors had already started to flee these markets–to a much greater extent than they had at the onset of the 2008 global financial crisis (IMF, 2020; World Bank, 2020). Such sudden stops in capital flows can cause significant drops in economic activity, with recoveries that can take several years to complete (Benigno et al. 2020). Unfortunately, austerity and currency depreciations as enacted during the global financial crisis won’t mitigate this double whammy of capital outflows and policies to cope with the pandemic. We argue that purchases of local currency government bonds could be a viable option for credible emerging market central banks to support macroeconomic policy goals in these circumstances.
September 28, 2020COVID-19 and the Search for Digital Alternatives to Cash
This analysis presents evidence on the impact of COVID-19 on consumer payment behavior, finding acceleration in the use of digital payment technology.
Posted at 7:00 am in Central Bank, Currency, Financial Intermediation, Household Finance, Pandemic | Permalink | Comments (0)September 22, 2020Expanding the Toolkit: Facilities Established to Respond to the COVID-19 Pandemic
Anna Kovner and Antoine Martin argue that the “credit” and lending facilities established by the Fed in response to the COVID-19 pandemic, while unprecedented, are a natural extension of the central bank’s existing toolkit.
Posted at 7:00 am in Central Bank, Crisis, Federal Reserve, Liquidity, Monetary Policy, Pandemic | Permalink | Comments (0)August 3, 2020The Federal Reserve’s Large-Scale Repo Program
The repo market faced extraordinary liquidity strains in March amid broader financial market volatility related to the coronavirus pandemic and uncertainty regarding the path of policy. The strains were particularly severe in the term repo market, in which borrowing and lending arrangements are for longer than one business day. In this post, we discuss the causes of the liquidity disruptions that arose in the repo market as well as the Federal Reserve’s actions to address those disruptions.
June 25, 2020Insider Networks
Erol and Lee consider the cat-and-mouse game played between financial regulators and those attempting to trade on inside information, including how insiders might form networks in order to circumvent restrictions, and how regulators might cope with insiders’ tactics.
Posted at 7:00 am in Bank Capital, Banks, Central Bank, Financial Institutions, Financial Intermediation, Financial Markets, Regulation | Permalink | Comments (0)June 18, 2020Bitcoin Is Not a New Type of Money
Bitcoin, and more generally, cryptocurrencies, are often described as a new type of money. In this post, we argue that this is a misconception. Bitcoin may be money, but it is not a new type of money. To see what is truly new about Bitcoin, it is useful to make a distinction between “money,” the asset that is being exchanged, and the “exchange mechanism,” that is, the method or process through which the asset is transferred. Doing so reveals that monies with properties similar to Bitcoin have existed for centuries. However, the ability to make electronic exchanges without a trusted party—a defining characteristic of Bitcoin—is radically new. Bitcoin is not a new class of money, it is a new type of exchange mechanism, and this type of exchange mechanism can support a variety of forms of money as well as other types of assets.
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