U.S. Banks and Global Liquidity

Abstract

We characterize how U.S. global systemically important banks (GSIBs) supply shortterm dollar liquidity in repo and foreign exchange swap markets in the post-Global Financial Crisis regulatory environment and serve as the "lenders-of-second-to-lastresort". Using daily supervisory bank balance sheet information, we find that U.S. GSIBs modestly increase their dollar liquidity provision in response to dollar funding shortages, particularly at period-ends, when the U.S. Treasury General Account balance increases, and during the balance sheet taper of the Federal Reserve. The increase in the dollar liquidity provision is mainly financed by reducing excess reserve balances at the Federal Reserve. Intra-firm transfers between depository institutions and broker-dealer subsidiaries within the same bank holding company are crucial to this type of "reserve-draining" intermediation. Finally, we discuss factors that contributed to the repo spike in September 2019 and the subsequent response of U.S. GSIBs to recent policy interventions by the Federal Reserve.

Covered interest parity deviations: Macrofinancial determinants

“…These estimates indicate that for each USD 1 billion swap drawing during quarter ends that are not also year ends, 20 basis points are added to the dollar basis on average (i.e., 260/6.5 − 40/2). Our ballpark estimates of the swaps-basis correlation based on swap line usage are broadly consistent with Correa, Du and Liao (2020), who use daily supervisory data on U.S. G-SIBs. 30 Further analysis of the implications of this correlation would require an explicit structural model of the swaps market.…”

“…By jointly scrutinizing the period-end jump in swap line usage by the ECB and the jump in the one-week EUR dollar basis, one obtains a further perspective on the impact of regulatory frictions. Furthermore, informed by the analysis in Section 4.1 and Correa, Du and Liao (2020), comparing the estimates for quarterends and year-ends provides further evidence of G-SIBs' retreat from exploiting CIP differentials.…”

“…The surcharge is assessed based on previous-year measures of banks' systemic importance, with the notional amount of OTC derivates explicitly considered under the "complexity" category of the sytemic risk indicators. 22 Based on year-end balance sheets (according to Correa, Du and Liao (2020) for the United States and Behn, Mangiante, Parisi and Wedow (2019) for Europe), this regulatory arrangement motivates window-dressing behaviors aimed at reducing the size of balance sheets toward year ends to avoid being assessed into a higher bucket of surcharges. 23 Berry, Khan and Rezende (2020) demonstrate that U.S. G-SIBs lower the amount of OTC derivatives during the fourth quarter of the year, while Behn, Mangiante, Parisi and Wedow (2019) offer similar evidence for European banks.…”

“…U.S. G-SIBs supply USD 10 billion less arbitrage capital during year ends compared with quarter ends (Figure8and C.3 in Correa, Du and Liao (2020)) through "reserve fracking" (tapping excess reserves at the Fed), and the associated additional widening of the intermediation cost of 150 basis points (Figure7inCorrea, Du and Liao (2020)) leads to a ballpark estimate of around 15 bps per billion dollar additional pressure on the one-week EUR dollar basis at year-ends.…”

Global Banks and Systemic Debt Crises

“…Third, the paper is related to the literature on international capital flows and the global financial cycle. This literature has documented a large comovement in debt and equity prices across countries (see, e.g., Forbes and Rigobon (2002), Longstaff, Pan, Pedersen, and Singleton (2011), Borri and Verdelhan (2011)), a strong link between international capital flows, domestic lending, and the occurrence of “sudden stops” in emerging economies (examples include Calvo (1998), Mendoza (2010), Rey (2015), Kalemli‐Özcan (2019)), and a relevant role of global banks in the transmission of international shocks (see, e.g., Devereux and Yetman (2010), Cetorelli and Goldberg (2011), Bruno and Shin (2015b), Baskaya, di Giovanni, Kalemli‐Ozcan, and Ulu (2017), Cao, Minetti, Olivero, and Romanini (2020), Correa, Du, and Liao (2020)). Our paper shows that global financial intermediaries can play a central role in these patterns.…”