U.S. Banks and Global Liquidity

Abstract

We characterize how U.S. global systemically important banks (GSIBs) supply short-term 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-last-resort". 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.

Complexity and riskiness of banking organizations: Evidence from the International Banking Research Network

“…Indeed, liquidity risk sharing could occur between the commercial bank and nonbank affiliates too, regardless of location. Correa, Du, and Liao (2020) document such liquidity risk management between banks and broker dealers in a sample of US GSIBs in response to dollar funding market shocks. Baggatini, Fecht, and Weber (2018) show that German banks moved stressed sovereign assets to their affiliated mutual funds during the European sovereign debt crisis.…”

“…Nonbank parts of a banking organization might be exposed to risk events that differ from the exposure of the core banking business. During periods of elevated returns in swap transactions in dollar funding markets, US commercial banks transact to increase dollar flows to their broker-dealer affiliates (Correa, Du, and Liao 2020). During the European sovereign debt crisis, German universal banks shifted risky sovereign holdings from banking units to related mutual funds (Bagattini, Fecht and Weber 2019).…”

The Central Bank Balance Sheet as a Policy Tool: Past, Present and Future

“…The August 2020 Financial Stability Report assesses the performance of market based finance, as well as the banking sector, during the height of the crisis. 80 As Vlieghe (2020) notes, this may also have important aggregate liquidity implications, as the level of excess reserves may determine banks' willingness to provide liquidity in different markets (see Correa, Du and Liao (2020)). 81 In the sense that non-banks are the 'ultimate' sellers of gilts: see footnote 11.…”

Reserves Were Not so Ample after All

“…The spread between U.S. Treasury overnight repo rates and the interest rate paid by Federal Reserve Banks on reserve balances (IOR) is a gauge of the sufficiency of reserve balances of large BHCs active in repo markets to meet counterparty funding and other "reserve draining" demands (Correa, Du and Liao, 2020), precautionary demands for reserves to meet intraday payment obligations (Ashcraft, McAndrews and Skeie, 2011), and regulatory liquidity requirements (Ihrig, 2019;d'Avernas and Vandeweyer, 2020). If the aggregate supply of reserves is ample for these combined purposes, then arbitrage would keep Treasury repo rates near IOR and wholesale funding markets would remain relatively liquid.…”