Effects of Changing Monetary and Regulatory Policy on Overnight Money Markets

45 Pages Posted: 20 Oct 2016

See all articles by Elizabeth Klee

Elizabeth Klee

Board of Governors of the Federal Reserve System

Zeynep Senyuz

Board of Governors of the Federal Reserve System

Emre Yoldas

Board of Governors of the Federal Reserve System

Date Written: 2016-09

Abstract

Money markets have been operating under a new monetary policy implementation framework since the Federal Reserve started paying interest on bank reserves in late 2008. The regulatory environment has also evolved substantially over this period. We develop and test hypotheses regarding the effects of changes in the monetary and regulatory policy on dynamics of key overnight funding markets. We find that the federal funds rate continued to provide an anchor, albeit weaker, for unsecured funding rates amid substantial decline in activity and changing composition of trades, while its transmission to the repo market had been hampered. The overnight reverse repurchase (ON RRP) operations that started in late 2013 contributed to stronger co-movement among overnight funding rates and markedly reduced their volatility. The change in the FDIC assessment fees and Basel III leverage ratio regulations have exacerbated financial-reporting-day effects in unsecured markets. In contrast, consistent with lower dealer leverage in the post-crisis period, such effects have weakened in the repo market, especially after the inception of the ON RRP facility. Finally, superabundant bank reserves appear to have significantly diminished the effects of reserve-maintenance on the money market rates.

Keywords: Overnight money markets, Federal funds, Repo, Eurodollar, Commercial paper, VAR models, GARCH models

JEL Classification: C32, E43, E52

Suggested Citation

Klee, Elizabeth and Senyuz, Zeynep and Yoldas, Emre, Effects of Changing Monetary and Regulatory Policy on Overnight Money Markets (2016-09). FEDS Working Paper No. 2016-084, Available at SSRN: https://ssrn.com/abstract=2856256 or http://dx.doi.org/10.17016/FEDS.2016.084

Elizabeth Klee (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Zeynep Senyuz

Board of Governors of the Federal Reserve System ( email )

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

Emre Yoldas

Board of Governors of the Federal Reserve System ( email )

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

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