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Discussion Paper
Measuring Settlement Fails
McMorrow, Michael; Keane, Frank M.; Fleming, Michael J.; Martin, Antoine (2014-09-19)
In June 2014, settlement fails of U.S. Treasury securities reached their highest level since the implementation of the Treasury fails charge in May 2009, attracting significant attention from market participants. In this post, we review what fails are, why they are of interest, and how they can be measured. In a companion post following this one, we evaluate the particular circumstances of the June 2014 fails.
Liberty Street Economics , Paper 20140919b

Discussion Paper
Regulatory Incentives and Quarter-End Dynamics in the Repo Market
Egelhof, James; Zinsmeister, Noah; Martin, Antoine (2017-08-07)
Since the global financial crisis, central bankers and other prudential authorities have been working to design and implement new banking regulations, known as Basel III, to reduce risk in the financial sector. Although most features of the Basel III regime are implemented consistently across jurisdictions, some important details vary. In particular, banks headquartered in the euro area, Switzerland, and Japan report their leverage ratios?essentially, capital divided by total consolidated assets?as a snapshot of their value on the last day of the quarter. In contrast, institutions ...
Liberty Street Economics , Paper 20170807

Discussion Paper
Market Failures and Official Sector Interventions
Kovner, Anna; Martin, Antoine (2020-09-23)
In the United States and other free market economies, the official sector typically has minimal involvement in market activities absent a clear rationale to justify intervention, such as a market failure. In this post, we consider arguments for official sector intervention, focusing on the market failure arising from externalities related to business closures. These externalities are likely to be particularly high for closures arising from pandemic-related economic disruptions. We discuss how the official sector, including institutions such as Congress and the Treasury, can increase social ...
Liberty Street Economics , Paper 20200923

Working Paper
Endogenous multiple currencies
Martin, Antoine (2002)
I study a model of multiple currencies in which sellers can choose the currency they will accept. I provide conditions that are necessary and sufficient to avoid indeterminacy of the exchange rate. Under these assumptions, all stable equilibria have the property that all sellers in the same country accept the same currency. Thus stable equilibria are either single currency or national currencies equilibria. I also show that currency substitution occurs as an endogenous response to high growth in the stock of a currency.
Research Working Paper , Paper RWP 02-03

Working Paper
Can the US Interbank Market be Revived?
Martin, Antoine; Kim, Kyungmin; Nosal, Ed (2018-12-21)
Large-scale asset purchases by the Federal Reserve as well as new Basel III banking regulations have led to important changes in U.S. money markets. Most notably the interbank market has essentially disappeared with the dramatic increase in excess reserves held by banks. We build a model in the tradition of Poole (1968) to study whether interbank market activity can be revived if the supply of excess reserves is decreased sufficiently. We show that it may not be possible to revive the market to pre-crisis volumes due to costs associated with recent banking regulations. Although the volume of ...
Finance and Economics Discussion Series , Paper 2018-088

Working Paper
Overnight RRP Operations as a Monetary Policy Tool: Some Design Considerations
Logan, Lorie; Martin, Antoine; Remache, Julie; McCabe, Patrick E.; Frost, Josh; Natalucci, Fabio M. (2015-02-19)
We review recent changes in monetary policy that have led to development and testing of an overnight reverse repurchase agreement (ON RRP) facility, an innovative tool for implementing monetary policy during the normalization process. Making ON RRPs available to a broad set of investors, including nonbank institutions that are significant lenders in money markets, could complement the use of the interest on excess reserves (IOER) and help control short-term interest rates. We examine some potentially important secondary effects of an ON RRP facility, both positive and negative, including ...
Finance and Economics Discussion Series , Paper 2015-10

Report
The fragility of short-term secured funding markets
von Thadden, Ernst-Ludwig; Skeie, David R.; Martin, Antoine (2013)
This paper develops a model of financial institutions that borrow short term and invest in long-term assets that can be traded in frictionless markets. Because these financial intermediaries perform maturity transformation, they are subject to potential runs. We derive distinct liquidity, collateral, and asset liquidation constraints, which determine whether a run can occur as a result of changing market expectations. We show that the extent to which borrowers can ward off an individual run depends on whether it has sufficient liquidity, collateral, and asset liquidation capacity. These ...
Staff Reports , Paper 630

Discussion Paper
The Odd Behavior of Repo Haircuts during the Financial Crisis
Copeland, Adam; Martin, Antoine (2012-09-17)
Since the financial crisis began, there’s been substantial debate on the role of haircuts in U.S. repo markets. (The haircut is the value of the collateral in excess of the value of the cash exchanged in the repo; see our blog post for more on repo markets.) In an influential paper, Gorton and Metrick show that haircuts increased rapidly during the crisis, a phenomenon they characterize as a general “run on repo.” Consequently, some policymakers and academics have considered whether regulating haircuts might help stabilize the repo markets, for example, by setting a minimum level so ...
Liberty Street Economics , Paper 20120917

Report
A study of competing designs for a liquidity-saving mechanism
McAndrews, James J.; Martin, Antoine (2008-07-01)
We study two designs for a liquidity-saving mechanism (LSM), a queuing arrangement used with an interbank settlement system. We consider an environment where banks are subjected to liquidity shocks. Banks must make the decision to send, queue, or delay their payments after observing a noisy signal of the shock. With a balance-reactive LSM, banks can set a balance threshold below which payments are not released from the queue. Banks can choose their threshold such that the release of a payment from the queue is conditional on the liquidity shock. With a receipt-reactive LSM, a payment is ...
Staff Reports , Paper 336

Discussion Paper
Stressed Outflows and the Supply of Central Bank Reserves
Kirk, Adam; Weed, Phillip; Martin, Antoine; Bush, Ryan; Zobel, Patricia (2019-02-20)
Since the financial crisis, banking regulators around the world have been intensely aware of liquidity risk and, in part as a response, have introduced the Basel III liquidity regulation. Today, the world's largest banks hold substantial liquidity buffers comprising both securities and central bank reserves, to satisfy internal liquidity stress tests and minimum quantitative regulatory requirements. The appropriate level of liquidity buffers depends on the likely outflows in a market stress situation. In this post, we use public data to provide a rough estimate of stressed outflows that the ...
Liberty Street Economics , Paper 20190220

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