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Working Paper
A Tale of Demand and Supply for Central Bank Reserves
In an ample-reserves framework, administered rates anchor money markets but suppress information from unsecured interbank trading. We recover that information by isolating the small interbank segment of the federal funds market. Using high-frequency bank-level data, we employ deposit shocks as an instrument for bank borrowing demand. Our analysis reveals that non-bank lenders, such as Federal Home Loan Banks, supply funds elastically, whereas bank lenders exhibit price inelasticity, which intensifies as their reserve balances decline, particularly for bankers’ banks. This interbank segment ...
Working Paper
Repo collateral fire sales: the effects of exemption from automatic stay
What are the consequences of a potential fire sale stemming from the exemption of repurchase agreements (repos) from automatic stay? This paper shows that repo's exemption from stay alters firms' financing and investment decisions ex ante. Specifically, a stay exemption changes firms' investment opportunity set, enabling them to purchase assets of defaulted firms at fire sale prices. Fire sales arise endogenously because of limited capital available to purchase collateral posted by insolvent firms, i.e., cash-in-the-market pricing. A fire sale effectively creates a premium for holding on to ...
Working Paper
Liquidity Windfalls: The Consequences of Repo Rehypothecation
This paper presents a model of repo rehypothecation in which dealers intermediate funds and collateral between cash lenders (e.g., money market funds) and prime brokerage clients (e.g., hedge funds). Dealers take advantage of their position as intermediaries, setting different repo terms with each counterparty. In particular, the difference in haircuts represents a positive cash balance for the dealer that can be an important source of liquidity. The model shows that dealers with higher default risk are more exposed to runs by collateral providers than to runs by cash lenders, who are ...
Working Paper
Private Money Creation with Safe Assets and Term Premia
It has been documented that an increase in the demand for safe assets induces the private sector to create more money-like claims. Focusing on private repos backed by U.S. Treasury securities, I show that an increase in the demand for safe assets leads to a decreases in the issuance of Treasury repos. The intuition is that Treasury securities already function as a safe asset, thus in terms of safe asset creation, private Treasury repos are neutral. In the model, Treasury repos are beneficial because they shift risk (i.e. term premia) from relatively risk averse households to a more risk ...
Working Paper
Collateral Runs
This paper models an unexplored source of liquidity risk faced by large broker-dealers: collateral runs. By setting different contracting terms on repurchase agreements with cash borrowers and lenders, dealers can source funds for their own activities. Cash borrowers internalize the risk of losing their collateral in case their dealer defaults, prompting them to withdraw it. This incentive creates strategic complementarities for counterparties to withdraw their collateral, reducing a dealer's liquidity position and compromising her solvency. Collateral runs are markedly different than ...
Working Paper
Bond Market Intermediation and the Role of Repo
This paper models the important role that repurchase agreements (repos) play in bond market intermediation. Not only do repos allow dealers to finance their activities, but they also increase dealers' ability to satisfy levered client demands without having to adjust their holdings of risky assets. In effect, the ability to borrow specific assets for delivery allows dealers to source large quantity of assets without taking ownership of them. Larger levered client orders imply larger asset borrowing demands, thus increasing the borrowing cost for the asset (i.e., repo specialness). Dealers ...
Working Paper
What Drives U.S. Treasury Re-use?
We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's total secured funding and their outright holdings financed through secured funding. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, ...
Working Paper
What Drives U.S. Treasury Re-use?
We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's secured funding and their outright holdings. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, U.S. dealers' re-use increases when ...
Working Paper
The Macroeconomic Implications of CBDC: A Review of the Literature
This paper provides an overview of the literature examining how the introduction of a CBDC would affect the banking sector, financial stability, and the implementation and transmission of monetary policy in a developed economy such as the United States. A CBDC has the potential to improve welfare by reducing financial frictions in deposit markets, by boosting financial inclusion, and by improving the transmission of monetary policy. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential ...
Working Paper
Retail Central Bank Digital Currencies: Implications for Banking and Financial Stability
This paper reviews the literature examining how the introduction of a retail CBDC would affect the banking sector and financial stability. A CBDC has the potential to improve welfare by reducing financial frictions, countering market power in deposit markets and enhancing the payment system. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability. The recycling of the new CBDC liability through asset purchases or lending by the central bank plays ...