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43 posts on "liquidity"
January 31, 2022

Pricing Liquidity without Preemptive Runs

Image of drop of water in pool with dollars

Prime money market funds (MMFs) are vulnerable to runs. This was dramatically illustrated in September 2008 and March 2020, when massive outflows from prime MMFs worsened stress in the short-term funding markets and eased only after taxpayer-supported interventions by the Treasury and the Federal Reserve. In this post, we describe how mechanisms like swing pricing that charge a price for liquidity can reduce the vulnerability of prime MMFs without triggering preemptive runs.

Posted at 7:00 am in Crisis, Financial Intermediation | Permalink
October 18, 2021

Were Banks Exposed to Sell-offs by Open-End Funds during the Covid Crisis?

Should open-end mutual funds experience redemption pressures, they may be forced to sell assets, thus contributing to asset price dislocations that in turn could be felt by other entities holding similar assets. This fire-sale externality  is a key rationale behind proposed and implemented regulatory actions. In this post, I quantify the spillover risks from fire sales, and present some preliminary results on the potential exposure of U.S. banking institutions to asset fire sales from open-end funds.

September 10, 2021

Twenty Years After 9/11, New York City’s Resilience Is Tested Once Again

As we mourn the tragic losses of the 9/11 attacks twenty years on, we thought it would be appropriate to re-examine the remarkable resilience New York City’s economy has shown over the years—a resilience that is once again being tested by the ongoing COVID-19 pandemic. In this Liberty Street Economics post, we look at how Lower Manhattan, in particular, has changed since that tragedy on a number of dimensions, and use that as a framework to think about how the city might change as a result of the COVID pandemic. 

Posted at 11:00 am in New York City, Pandemic | Permalink
June 2, 2021

Sophisticated and Unsophisticated Runs

In March 2020, U.S. prime money market funds (MMFs) suffered heavy outflows following the liquidity shock triggered by the COVID-19 crisis. In a previous post, we characterized the run on the prime MMF industry as a whole and the role of the liquidity facility established by the Federal Reserve (the Money Market Mutual Fund Liquidity Facility) in stemming the run. In this post, based on a recent Staff Report, we contrast the behaviors of retail and institutional investors during the run and explain the different reasons behind the run.

Posted at 7:00 am in Financial Intermediation | Permalink
March 24, 2021

Did Dealers Fail to Make Markets during the Pandemic?

Sarkar and coauthors liquidity provision by dealers in several important financial markets during the COVID-19 pandemic: how much was provided, possible causes of any shortfalls, and the effects of the Federal Reserve’s actions to support the economy.

February 18, 2021

How Competitive are U.S. Treasury Repo Markets?

The Treasury repo market is at the center of the U.S. financial system, serving as a source of secured funding as well as providing liquidity for Treasuries in the secondary market. Recently, results published by the Bank for International Settlements (BIS) raised concerns that the repo market may be dominated by as few as four banks. In this post, we show that the secured funding portion of the repo market is competitive by demonstrating that trading is not concentrated overall and explaining how the pricing of inter-dealer repo trades is available to a wide-range of market participants. By extension, rate-indexes based on repo trades, such as SOFR, reflect a deep market with a broad set of participants.

November 16, 2020

How Has COVID-19 Affected Banking System Vulnerability?

Kristian Blickle, Matteo Crosignani, Fernando Duarte, Thomas Eisenbach, Fulvia Fringuellotti, and Anna Kovner The COVID-19 pandemic has led to significant changes in banks’ balance sheets. To understand how these changes have affected the stability of the U.S. banking system, we provide an update of four analytical models that aim to capture different aspects of banking system […]

Posted at 7:00 am in Financial Institutions, Pandemic | Permalink
August 26, 2020

How Does the Liquidity of New Treasury Securities Evolve?

In a recent Liberty Street Economics post, we showed that the newly reintroduced 20-year bond trades less than other on-the-run Treasury securities and has similar liquidity to that of the more interest‑rate‑sensitive 30-year bond. Is it common for newly introduced securities to trade less and with higher transaction costs, and how does security trading behavior change over time? In this post, we look back at how liquidity evolved for earlier reintroductions of Treasury securities so as to gain insight into how liquidity might evolve for the new 20-year bond.

Posted at 7:00 am in Financial Markets | Permalink | Comments (3)
July 7, 2020

A New Reserves Regime? COVID-19 and the Federal Reserve Balance Sheet

Aggregate reserves declined from nearly $3 trillion in August 2014 to $1.4 trillion in mid-September 2019, as the Federal Reserve normalized its balance sheet. This decline came to a halt in September 2019 when the Federal Reserve responded to turmoil in short-term money markets, with reserves fluctuating around $1.6 trillion in the early months of 2020. Then, in response to the COVID-19 pandemic, the Federal Reserve dramatically expanded its balance sheet, both directly, through outright purchases and repurchase agreements, and indirectly, as a consequence of the facilities to support market functioning and the flow of credit to the real economy. In this post, we characterize the increase in reserves between March and June 2020, describing changes to the distribution and concentration of reserves.

May 29, 2020

Treasury Market Liquidity and the Federal Reserve during the COVID-19 Pandemic

This analysis zeroes in on the Treasury market in early 2020 to better understand how the Fed’s actions regarding the COVID-19 pandemic evolved in relation to day-to-day market developments.

Posted at 7:00 am in Financial Markets | Permalink | Comments (2)
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