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Working Paper
An Empirical Study of Trade Dynamics in the Fed Funds 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.
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 ...
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.
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 ...
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 ...
Discussion Paper
Do “Too-Big-To-Fail” Banks Take On More Risk?
In the previous post, Joo Santos showed that the largest banks benefit from a bigger discount in the bond market relative to the largest nonbank financial and nonfinancial issuers. Today?s post approaches a complementary Too-Big-to-Fail (TBTF) question?do banks take on more risk if they?re likely to receive government support? Historically, commentators have expressed concerns that TBTF status encourages banks to engage in risky behavior. However, empirical evidence to substantiate these concerns thus far has been sparse. Using new ratings from Fitch, we tackle this question by examining how ...
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 ...
Journal Article
Do \\"Too-Big-to-Fail\\" banks take on more risk?
The notion that some banks are ?too big to fail? builds on the premise that governments will offer support to avoid the adverse consequences of disorderly bank failures. However, this promise of support comes at a cost: Large, complex, or interconnected banks might take on more risk if they expect future rescues. This article studies the effect of potential government support on banks? appetite for risk. Using balance-sheet data for 224 banks in forty-five countries starting in March 2007, the authors find higher levels of impaired loans after an increase in government support. To measure ...
Working Paper
The Over-the-Counter Theory of the Fed Funds Market: A Primer
We present a dynamic over-the-counter model of the fed funds market and use it to study the determination of the fed funds rate, the volume of loans traded, and the intraday evolution of the distribution of reserve balances across banks. We also investigate the implications of changes in the market structure, as well as the effects of central bank policy instruments such as open market operations, the discount window lending rate, and the interest rate on bank reserves.
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.