Working Paper
The mechanics of a graceful exit: interest on reserves and segmentation in the federal funds market
Bech, Morten L.; Klee, Elizabeth C. (2010)
To combat the financial crisis that intensified in the fall of 2008, the Federal Reserve injected a substantial amount of liquidity into the banking system. The resulting increase in reserve balances exerted downward price pressure in the federal funds market, and the effective federal funds rate began to deviate from the target rate set by the Federal Open Market Committee. In response, the Federal Reserve revised its operational framework for implementing monetary policy and began to pay interest on reserve balances in an attempt to provide a floor for the federal funds rate. Nevertheless, ...
Finance and Economics Discussion Series , Paper 2010-07

Journal Article
Settlement liquidity and monetary policy implementation—lessons from the financial crisis
Bech, Morten L.; McAndrews, James J.; Martin, Antoine (2012-03)
The U.S. dollar clearing and settlement system received little attention during the recent financial crisis, mainly because it performed reliably, processing record volumes and values of trades made in stressed financial markets. This article shows how Federal Reserve policy measures aimed at providing liquidity and stability to the financial system during and after the crisis had a major impact on settlement liquidity and thus on the efficiency of clearing and settlement system activity. The measures led to a substantial decrease in daylight overdrafts extended by the Federal Reserve and a ...
Economic Policy Review , Volume 18 , Issue Mar , Pages 3-20

Journal Article
Profits and balance sheet developments at U.S. commercial banks in 2008
Rice, Tara N.; Bech, Morten L. (2009)
Reviews recent developments in the balance sheets and in the profitability of U.S. commercial banks. The article discusses how developments in the U.S. banking industry in 2008 and early 2009 were related to changes in financial markets and in the broader economy.
Federal Reserve Bulletin , Volume 95 , Issue 6

Journal Article
Global trends in large-value payments
Preisig, Christine; Bech, Morten L.; Soramaki, Kimmo (2008-09)
Globalization and technological innovation are two major forces affecting the financial system and its infrastructure. Perhaps nowhere are these trends more apparent than in the internationalization and automation of payments. While the effects of globalization and technological innovation are most obvious on retail payments, the influence is equally impressive on wholesale, or interbank, payments. Given the importance of payments and settlement systems to the smooth operation and resiliency of the financial system, it is important to understand the potential consequences of these ...
Economic Policy Review , Volume 14 , Issue Sep , Pages 59-81

Report
Which bank is the \\"central\\" bank? an application of Markov theory to the Canadian Large Value Transfer System
Garratt, Rod; Chapman, James T. E.; Bech, Morten L. (2008-11-01)
Recently, economists have argued that a bank's importance within the financial system depends not only on its individual characteristics but also on its position within the banking network. A bank is deemed to be "central" if, based on our network analysis, it is predicted to hold the most liquidity. In this paper, we use a method similar to Google's PageRank procedure to rank banks in the Canadian Large Value Transfer System (LVTS). In doing so, we obtain estimates of the payment processing speeds for the individual banks. These differences in processing speeds are essential for ...
Staff Reports , Paper 356

Report
The mechanics of a graceful exit: interest on reserves and segmentation in the federal funds market
Bech, Morten L.; Klee, Elizabeth C. (2009-12-01)
To combat the financial crisis that intensified in the fall of 2008, the Federal Reserve injected a substantial amount of liquidity into the banking system. The resulting increase in reserve balances exerted downward price pressure in the federal funds market, and the effective federal funds rate began to deviate from the target rate set by the Federal Open Market Committee. In response, the Federal Reserve revised its operational framework for implementing monetary policy and began to pay interest on reserve balances in an attempt to provide a floor for the federal funds rate. Nevertheless, ...
Staff Reports , Paper 416

Working Paper
The Federal Home Loan Bank System: the lender of next-to-last resort?
Bech, Morten L.; Ashcraft, Adam B.; Frame, W. Scott (2009)
The Federal Home Loan Bank (FHLB) System is a large, complex, and understudied government-sponsored liquidity facility that currently has more than $1 trillion in secured loans outstanding, mostly to commercial banks and thrifts. This paper first documents the significant role played by the FHLB System at the outset of the ongoing financial crisis and then provides evidence about the uses of these funds by their bank and thrift members. We then identify the trade-offs faced by FHLB member-borrowers when choosing between accessing the FHLB System or the Federal Reserve's discount window during ...
FRB Atlanta Working Paper , Paper 2009-04

Report
Congestion and cascades in payment systems
Beyeler, Walter E.; Glass, Robert J.; Bech, Morten L.; Soramaki, Kimmo (2006)
We develop a parsimonious model of the interbank payment system to study congestion and the role of liquidity markets in alleviating congestion. The model incorporates an endogenous instruction arrival process, scale-free topology of payments between banks, fixed total liquidity that limits banks' capacity to process arriving instructions, and a global market that distributes liquidity. We find that at low liquidity, the system becomes congested and payment settlement loses correlation with payment instruction arrival, becoming coupled across the network. The onset of congestion is evidently ...
Staff Reports , Paper 259

Report
Technology diffusion within central banking: the case of real-time gross settlement
Bech, Morten L.; Hobijn, Bart (2006)
We examine the diffusion of real-time gross settlement (RTGS) technology across all 174 central banks. RTGS reduces settlement risk and facilitates financial innovation in the settlement of foreign exchange trades. In 1985, only three central banks had implemented RTGS systems, and by year-end 2005, that number had increased to ninety. We find that the RTGS diffusion process is consistent with the standard S-curve prediction. Real GDP per capita, the relative price of capital, and trade patterns explain a significant part of the cross-country variation in RTGS adoption. These determinants are ...
Staff Reports , Paper 260

Working Paper
Arbitrage, liquidity and exit: the repo and federal funds markets before, during, and emerging from the financial crisis
Klee, Elizabeth C.; Bech, Morten L.; Stebunovs, Viktors (2012)
This paper examines the link between the federal funds and repo markets, before, during, and emerging from the financial crisis that began in August 2007. In particular, the paper investigates the initial transmission of monetary policy to closely related money markets, pricing of risk, and liquidity effects, and then shows how these could interact if the Federal Reserve removes the substantial amount of liquidity currently in the federal funds market. The results suggest that pass-through from the federal funds rate to the repo deteriorated somewhat during the zero lower bound period, likely ...
Finance and Economics Discussion Series , Paper 2012-21