Banks’ Balance-Sheet Costs, Monetary Policy, and the ON RRP

Afonso, Gara; Cipriani, Marco; La Spada, Gabriele

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Banks’ Balance-Sheet Costs, Monetary Policy, and the ON RRP

Abstract: Using a quasi-natural experiment, we show that quantitative easing (QE) interacts with bank regulation, impacting the size and portfolio choices of non-banks. In 2021, upon the expiration of the Supplementary Leverage Ratio (SLR) relief, banks were incentivized to reduce leverage, shedding deposits and reducing the supply of wholesale debt. We show that as a result, moneymarket funds (MMFs) experienced large inflows and shifted their portfolios toward the Federal Reserve’s ONRRP facility. Our results imply that when non-banks can access the central-bank balance sheet, they end up holding a share of central-bank liabilities, draining reserves and attenuating the impact of QE.

Keywords: balance sheet constraints; banks; leverage ratio; monetary policy; money market funds; overnight reverse repo (ON RRP);

JEL Classification: E41; E51; E58; G10; G21;