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65 posts on "Liquidity"

May 19, 2020

The Primary Dealer Credit Facility



The Primary Dealer Credit Facility

This post is part of an ongoing series on the credit and liquidity facilities established by the Federal Reserve to support households and businesses during the COVID-19 outbreak.

On March 17, 2020, the Federal Reserve announced that it would re-establish the Primary Dealer Credit Facility (PDCF) to allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households. The PDCF started offering overnight and term funding with maturities of up to ninety days on March 20. It will be in place for at least six months and may be extended as conditions warrant. In this post, we provide an overview of the PDCF and its usage to date.

Continue reading "The Primary Dealer Credit Facility" »

May 15, 2020

The Commercial Paper Funding Facility



LSE_2020_facilities-cpff_crump_460

This post is part of an ongoing series on the credit and liquidity facilities established by the Federal Reserve to support households and businesses during the COVID-19 outbreak.

In mid-March, the Federal Reserve announced a slew of credit and liquidity facilities aimed at supporting credit provision to U.S. households and businesses. Among the initiatives is the Commercial Paper Funding Facility (CPFF) which aims to support market functioning and provide a liquidity backstop for the commercial paper market. The domestic commercial paper market provides a venue for short-term financing for companies which employ more than 6 million Americans. Securities in the commercial paper market represent a key asset class for money market mutual funds. This post documents the dislocations in the commercial paper market that motivated the creation of this facility, and tracks the subsequent improvement in market conditions.

Continue reading "The Commercial Paper Funding Facility" »

May 08, 2020

The Money Market Mutual Fund Liquidity Facility



LSE_2020_facilities-mmlf_laspada_art_460

This post is part of an ongoing series on the credit and liquidity facilities established by the Federal Reserve to support households and businesses during the COVID-19 outbreak.

Over the first three weeks of March, as uncertainty surrounding the COVID-19 pandemic increased, prime and municipal (muni) money market funds (MMFs) faced large redemption pressures. Similarly to past episodes of industry dislocation, such as the 2008 financial crisis and the 2011 European bank crisis, outflows from prime and muni MMFs were mirrored by large inflows into government MMFs, which have historically been seen by investors as a safe haven in times of crisis. In this post, we describe a liquidity facility established by the Federal Reserve in response to these outflows.

Continue reading "The Money Market Mutual Fund Liquidity Facility" »

January 13, 2020

How Does Information Affect Liquidity in Over-the-Counter Markets?



How Does Information Affect Liquidity in Over-the-Counter Markets?

A large volume of financial transactions occur in decentralized markets that commonly depend on a network of dealers. Dealers face two impediments to providing liquidity in these markets. First, dealers may face informed traders. Second, they may face costs associated with maintaining large balance sheets, either due to inventory or liquidity costs. In a recent paper, we study a model of over-the-counter (OTC) markets in which liquidity is endogenously determined by dealers who must contend with both asymmetric information and liquidity costs. This post provides an intuitive explanation of our model and the dynamics of interdealer liquidity.

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Posted by Blog Author at 7:00 AM in Dealers, Liquidity | Permalink | Comments (0)

January 06, 2020

The Evolving Market for U.S. Sovereign Credit Risk



The Evolving Market for U.S. Sovereign Credit Risk

How should we measure market expectations of the U.S. government failing to meet its debt obligations and thereby defaulting? A natural candidate would be to use the spreads on U.S. sovereign single-name credit default swaps (CDS): since a CDS provides insurance to the buyer for the possibility of default, an increase in the CDS spread would indicate an increase in the market-perceived probability of a credit event occurring. In this post, we argue that aggregate measures of activity in U.S. sovereign CDS mask a decrease in risk-forming transactions after 2014. That is, quoted CDS spreads in this market are based on few, if any, market transactions and thus may be a misleading indicator of market expectations.

Continue reading "The Evolving Market for U.S. Sovereign Credit Risk" »

Posted by Blog Author at 7:00 AM in Financial Markets, Liquidity | Permalink | Comments (1)

December 18, 2019

Banking System Vulnerability: Annual Update



Banking System Vulnerability: Annual Update

A key part of understanding the stability of the U.S. financial system is to monitor leverage and funding risks in the financial sector and the way in which these vulnerabilities interact to amplify negative shocks. In this post, we provide an update of four analytical models, introduced in a Liberty Street Economics post last year, that aim to capture different aspects of banking system vulnerability. Since their introduction, vulnerabilities as indicated by these models have increased moderately, continuing the slow but steady upward trend that started around 2016. Despite the recent increase, the overall level of vulnerabilities according to this analysis remains subdued and is still significantly smaller than before the financial crisis of 2008-09.

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November 13, 2019

The Side Effects of Shadow Banking on Liquidity Provision



Correction: When this post was first published, line labels in the panel showing Tier 1 capital ratios were reversed; the labels have been corrected. (November 13, 10:40 a.m.)

The Side Effects of Shadow Banking on Liquidity Provision

Over the past two decades, the growth of shadow banking has transformed the way the U.S. banking system funds corporations. In this post, we describe how this growth has affected both the term loan and credit line businesses, and how the changes have resulted in a reduction in the liquidity insurance provided to firms.

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

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.

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

March 06, 2019

Assessing the Price Impact of Treasury Market Workups



LSE_2019_Assessing the Price Impact of Treasury Market Workups

The price impact of a trade derives largely from its information content. The “workup” mechanism, a trading protocol used in the U.S. Treasury securities market, is designed to mitigate the instantaneous price impact of a trade by allowing market participants to trade additional quantities of a security after a buyer and seller first agree on its price. Nevertheless, workup trades are not necessarily free of information. In this post, we assess the role of workups in price discovery, following our recent paper in the Review of Asset Pricing Studies (an earlier version of which was released as a New York Fed staff report).

Continue reading "Assessing the Price Impact of Treasury Market Workups" »

Posted by Blog Author at 7:00 AM in Fed Funds, Financial Markets, Liquidity, Treasury | Permalink | Comments (1)
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