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24 posts on "Federal Reserve"

July 17, 2019

How Do Large Banks Manage Their Cash?



Second of two posts
How Do Large Banks Manage Their Cash?

As the aggregate supply of reserves shrinks and large banks implement liquidity regulations, they may follow a variety of liquidity management strategies depending on their business models and the interest rate differences between alternative liquid instruments. For example, the banks may continue to hold large amounts of excess reserves or shift to Treasury or agency securities or shrink their balance sheets. In this post, we provide new evidence on how large banks have managed their cash, which is the largest component of reserves, on a daily basis since the implementation of liquidity regulations.

Continue reading "How Do Large Banks Manage Their Cash?" »

Posted by Blog Author at 7:00 AM in Banks, Federal Reserve, Liquidity, Regulation | Permalink | Comments (2)

July 15, 2019

Large Bank Cash Balances and Liquidity Regulations



Update (9 a.m.): An earlier version of this post transposed line labels in the first figure. The error has been corrected.

First of two posts
Large Bank Cash Balances and Liquidity Regulations

The Federal Open Market Committee (FOMC) has recently communicated its aim to continue implementing monetary policy in a regime that maintains an ample supply of reserves, though with a significantly lower level of reserves than has prevailed in recent years. The liquidity needs of the largest U.S. commercial banks play an important role in understanding the banking system’s appetite for actual reserve holdings, which we refer to as bank reserve demand. In this post, we discuss the recent evolution of large bank cash balances and the effect of liquidity regulations on these balances. In part two of this series, we provide new evidence on how the largest banks manage their liquidity needs on a daily basis.

Continue reading "Large Bank Cash Balances and Liquidity Regulations" »

Posted by Blog Author at 7:00 AM in Banks, Federal Reserve, Fire Sale, Liquidity | Permalink | Comments (1)

July 08, 2019

From Policy Rates to Market Rates—Untangling the U.S. Dollar Funding Market



From Policy Rates to Market Rates—Untangling the U.S. Dollar Funding Market

How do changes in the rate that the Federal Reserve pays on reserves held by depository institutions affect rates in money markets in which the Fed does not participate? Through which channels do changes in the so-called administered rates reach rates in onshore and offshore U.S. dollar money markets? In this post, we answer these questions with the help of an interactive map that guides us through the web of interconnected relationships between the Fed, key market players, and the various instruments in the U.S. dollar funding market, highlighting the linkages across the short-term financial products that form this market.

Continue reading "From Policy Rates to Market Rates—Untangling the U.S. Dollar Funding Market" »

Posted by Blog Author at 7:00 AM in Banks, Central Bank, Fed Funds, Federal Reserve, Monetary Policy | Permalink | Comments (5)

May 17, 2019

Understanding Cyber Risk: Lessons from a Recent Fed Workshop



Understanding Cyber Risk: Lessons from a Recent Fed Workshop

Cyber risk poses a major threat to financial stability, yet financial institutions still lack consensus on the definition of and terminology around cyber risk and have no common framework for confronting these hazards. This impedes efforts to measure and manage such risk, diminishing institutions’ individual and collective readiness to handle system-level cyber threats. In this blog post, we describe the proceedings of a recent workshop where leading risk managers, academics, and policy makers gathered to discuss proposals for countering cyber risk. This workshop is part of a joint two-phase initiative run by the Federal Reserve Banks of Richmond and New York and the Fed’s Board of Governors to harmonize cyber risk identification, classification, and measurement practices.

Continue reading "Understanding Cyber Risk: Lessons from a Recent Fed Workshop" »

Posted by Blog Author at 7:00 AM in Banks, Central Bank, Federal Reserve, Systemic Risk | Permalink | Comments (0)

May 06, 2019

Selected Deposits and the OBFR



Selected Deposits and the OBFR

The Federal Reserve Bank of New York recently decided to revise the composition of the Overnight Bank Funding Rate (OBFR), a reference rate measuring the cost banks face to borrow overnight in unsecured U.S. dollar-denominated money markets. Specifically, in addition to the federal funds and Eurodollar transactions currently comprising the OBFR, the OBFR now also includes overnight, interest-bearing demand deposits (at rates negotiated between the counterparties and excluding deposits payable on demand) booked within banks’ U.S. offices, known as “selected deposits.” In this post, we discuss the change in more detail, the reason for including selected deposits, and the likely impact on the OBFR’s published values.

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Posted by Blog Author at 7:00 AM in Central Bank, Fed Funds, Federal Reserve, Monetary Policy | Permalink | Comments (0)

February 27, 2019

Global Trends in Interest Rates



LSE_2019_Global Trends in Interest Rates

Long-term government bond yields are at their lowest levels of the past 150 years in advanced economies. In this blog post, we argue that this low-interest-rate environment reflects secular global forces that have lowered real interest rates by about two percentage points over the past forty years. The magnitude of this decline has been nearly the same in all advanced economies, since their real interest rates have converged over this period. The key factors behind this development are an increase in demand for safety and liquidity among investors and a slowdown in global economic growth.

Continue reading "Global Trends in Interest Rates" »

February 20, 2019

Stressed Outflows and the Supply of Central Bank Reserves



LSE_Stressed Outflows and the Supply of Central Bank Reserves

Since the financial crisis, banking regulators around the world have been intensely aware of liquidity risk and, in part as a response, have introduced the Basel III liquidity regulation. Today, the world’s largest banks hold substantial liquidity buffers comprising both securities and central bank reserves, to satisfy internal liquidity stress tests and minimum quantitative regulatory requirements. The appropriate level of liquidity buffers depends on the likely outflows in a market stress situation. In this post, we use public data to provide a rough estimate of stressed outflows that the largest banks would face and consider how they could meet these outflows.

Continue reading "Stressed Outflows and the Supply of Central Bank Reserves" »

Posted by Blog Author at 7:00 AM in Banks, Federal Reserve, Liquidity | Permalink | Comments (1)

October 15, 2018

Did Banks Subject to LCR Reduce Liquidity Creation?



LSE_2018_Did Banks Subject to LCR Reduce Liquidity Creation?

Banks traditionally provide loans that are funded mostly by deposits and thereby create liquidity, which benefits the economy. However, since the loans are typically long-term and illiquid, whereas the deposits are short-term and liquid, this creation of liquidity entails risk for the bank because of the possibility that depositors may “run” (that is, withdraw their deposits on short notice). To mitigate this risk, regulators implemented the liquidity coverage ratio (LCR) following the financial crisis of 2007-08, mandating banks to hold a buffer of liquid assets. A side effect of the regulation, however, is a reduction in liquidity creation by banks subject to LCR, as we find in our recent paper.

Continue reading "Did Banks Subject to LCR Reduce Liquidity Creation?" »

August 08, 2018

How Do the Fed’s MBS Holdings Affect the Economy?



LSE_How Do the Fed’s MBS Holdings Affect the Economy?

In our previous post, we discussed the meaning of the term “credit allocation” and how it relates to the Federal Reserve’s holdings of agency mortgage-backed securities (MBS). We concluded that the Fed’s MBS holdings do not pose significant credit risk but that the Fed does influence the relative market price of credit when it purchases agency MBS, and this indirectly influences decisions by investors. Today, we take the next step and discuss how the Fed’s MBS purchases affect the U.S. economy and, in particular, how the effect of MBS purchases can differ from the effect of purchases of Treasury securities.

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Posted by Blog Author at 7:00 AM in Bank Capital, Federal Reserve, Monetary Policy | Permalink | Comments (2)

August 06, 2018

How Do the Fed's MBS Purchases Affect Credit Allocation?



LSE_How Do the Fed's MBS Purchases Affect Credit Allocation?

It is sometimes said that the Federal Reserve should not engage in “credit allocation.” But what does credit allocation actually mean? And how do current Fed policies affect the allocation of credit? In this post, we describe two separate ideas often associated with credit allocation. The first idea is that the Fed should not take credit risk, which taxpayers would ultimately have to bear. The second idea is that the Fed’s actions should not influence the flow of credit to particular sectors. We consider whether the Fed’s holdings of agency mortgage-backed securities (MBS) could affect the allocation of credit. In a companion post, we discuss how the economic effects of the Fed’s MBS holdings compare with the economic effects of more traditional holdings.

Continue reading "How Do the Fed's MBS Purchases Affect Credit Allocation?" »

Posted by Blog Author at 7:00 AM in Central Bank, Federal Reserve, Monetary Policy | Permalink | Comments (0)
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