Reserve Balances, the Federal Funds Market and Arbitrage in the New Regulatory Framework

37 Pages Posted: 26 Sep 2016

See all articles by Ayelen Banegas

Ayelen Banegas

Board of Governors of the Federal Reserve System

Manjola Tase

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: 2016-09-01

Abstract

We study developments in reserve balances and the federal funds market in the context of two banking regulatory changes: the widening of the Federal Deposit Insurance Corporation (FDIC) assessment base and the introduction of the Basel III leverage ratio. Using a novel data set that includes FDIC fees and balance sheet data for depository institutions, we find that, as most foreign banks were not subject to the FDIC fee, they absorbed increasing amounts of reserve balances. Furthermore, foreign banks experienced positive and improving conditions for arbitraging between borrowing reserve balances in the federal funds market and earning interest on excess reserves by holding those reserves at the Federal Reserve Banks, contributing to an increase in federal funds borrowing by foreign banks relative to domestic banks. However, the implementation of the Basel III leverage ratio was associated with temporary declines in foreign bank federal funds borrowing at reporting dates.

Keywords: Basel III ratios, FDIC fees, IOER arbitrage, Reserve balances, Federal funds market

JEL Classification: E49, E52, G28

Suggested Citation

Banegas, Ayelen and Tase, Manjola, Reserve Balances, the Federal Funds Market and Arbitrage in the New Regulatory Framework (2016-09-01). FEDS Working Paper No. 2016-079, Available at SSRN: https://ssrn.com/abstract=2842939 or http://dx.doi.org/10.17016/FEDS.2016.079

Ayelen Banegas (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Manjola Tase

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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