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Author:Afonso, Gara M. 

Discussion Paper
Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics

As a consequence of the Federal Reserve’s large-scale asset purchases from 2008-14, banks’ reserve balances at the Fed have increased dramatically, rising from $10 billion in March 2008 to more than $2 trillion currently. In that new environment of abundant reserves, the FOMC put in place a framework for controlling the fed funds rate, using the interest rate that it offered to banks and a different, lower interest rate that it offered to non-banks (and banks). Now that the Fed has begun to gradually reduce its asset holdings, aggregate reserves are shrinking as well, and an important ...
Liberty Street Economics , Paper 20180711

Report
A model of the federal funds market: yesterday, today, and tomorrow

The landscape of the federal funds market changed drastically in the wake of the Great Recession as large-scale asset purchase programs left depository institutions awash with reserves and new regulations made it more costly for these institutions to lend. As traditional levers for implementing monetary policy became less effective, the Federal Reserve introduced new tools to implement the target range for the federal funds rate, changing this landscape even more. In this paper, we develop a model that is capable of reproducing the main features of the federal funds market, as observed before ...
Staff Reports , Paper 840

Report
Trade dynamics in the market for federal funds

We use minute-by-minute daily transaction-level payments data to document the cross-sectional and time-series behavior of the estimated prices and quantities negotiated by commercial banks in the interbank market. We study the frequency and volume of trade, the size distribution of loans, the distribution of bilateral rates, and the intraday dynamics of the reserve balances held by commercial banks. We find evidence of the importance of the liquidity provision achieved by commercial banks that act as de facto intermediaries of funds.
Staff Reports , Paper 549

Report
Monetary Policy Implementation with an Ample Supply of Reserves

Methods of monetary policy implementation continue to change. The level of reserve supply—scarce, abundant, or somewhere in between—has implications for the efficiency and effectiveness of an implementation regime. The money market events of September 2019 highlight the need for an analytical framework to better understand implementation regimes. We discuss major issues relevant to the choice of an implementation regime, using a parsimonious framework and drawing from the experience in the United States since the 2007-09 financial crisis. We find that the optimal level of reserve supply ...
Staff Reports , Paper 910

Discussion Paper
Did the Dodd-Frank Act End ‘Too Big to Fail’?

One goal of the Dodd-Frank Act of 2010 was to end ?too big to fail.? Toward that goal, the Act required systemically important financial institutions to submit detailed plans for an orderly resolution (?living wills?) and authorized the FDIC to create an alternative resolution procedure. In response, the FDIC has developed a ?single point of entry? (SPOE) strategy, under which healthy parent companies bear the losses of their failing subsidiaries. Since SPOE makes the parent company responsible for subsidiaries? losses, we would expect that parents have become riskier, relative to their ...
Liberty Street Economics , Paper 20180305

Report
An empirical study of trade dynamics in the interbank market

We use minute-by-minute daily transaction-level payments data to document the cross-sectional and time-series behavior of the estimated prices and quantities negotiated by commercial banks in the fed funds market. We study the frequency and volume of trade, the size distribution of loans, the distribution of bilateral fed funds rates, and the intraday dynamics of the reserve balances held by commercial banks. We find evidence of the importance of the liquidity provision achieved by commercial banks that act as de facto intermediaries of fed funds.
Staff Reports , Paper 550

Report
How do global banks scramble for liquidity? Evidence from the asset-backed commercial paper freeze of 2007

We investigate how banks scrambled for liquidity following the asset-backed commercial paper (ABCP) market freeze of August 2007 and its implications for corporate borrowing. Commercial banks in the United States raised dollar deposits and took advances from Federal Home Loan Banks (FHLBs), while foreign banks had limited access to such alternative dollar funding. Relative to before the ABCP freeze and relative to their non-dollar lending, foreign banks with ABCP exposure charged higher interest rates to corporations for dollar-denominated syndicated loans. The results point to a funding risk ...
Staff Reports , Paper 623

Discussion Paper
What Do Rating Agencies Think about “Too-Big-to-Fail” since Dodd-Frank

Did the Dodd-Frank Act end ??too-big-to-fail?? (TBTF)? In this series of two posts, we look at this question through the lens of rating agencies and financial markets. Today we begin by discussing rating agencies? views on this topic.
Liberty Street Economics , Paper 20150629

Discussion Paper
Why (or Why Not) Keep Paying Interest on Excess Reserves?

In the fall of 2008, the Fed added new policy tools to its portfolio of techniques for implementing monetary policy. In particular, since October 9, 2008, depository institutions in the United States have been paid interest on the balances they hold overnight at Federal Reserve Banks (see Federal Reserve Board announcement). Several other central banks, such as the European Central Bank (ECB) and the central banks of Canada, England, and Australia, have somewhat similar deposit facilities allowing banks to earn overnight rates on their balances. In this post, I discuss the benefits and costs ...
Liberty Street Economics , Paper 20121203

Report
Precautionary Demand and Liquidity in Payment Systems

In large-value real-time gross settlement payment systems, banks rely heavily on incoming funds to finance outgoing payments. Such reliance necessitates a high degree of coordination and synchronization. We construct a model of a payment system calibrated for the U.S. Fedwire system and examine the impact of realistic disruptions motivated by the recent financial crisis. In such settings, individually cautious behavior can have a significant and detrimental impact on the overall functioning of the payment system through a multiplier effect. Our results quantify the mutually reinforcing nature ...
Staff Reports , Paper 352

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