How Have Banks Been Managing the Composition of High-Quality Liquid Assets?

28 Pages Posted: 7 Sep 2017 Last revised: 17 Feb 2018

Jane E. Ihrig

Federal Reserve Board - International Financial Transactions

Ashish Kumbhat

Board of Governors of the Federal Reserve System

Cindy M. Vojtech

affiliation not provided to SSRN

Gretchen C. Weinbach

Federal Reserve Board

Cindy M. Vojtech

Board of Governors of the Federal Reserve System

Date Written: 2017-08-30

Abstract

We study banks' post-crisis liquidity management. We construct time series of U.S. banks' holdings of high-quality liquid assets (HQLA) and examine how these assets have been managed in recent years to comply with the Liquidity Coverage Ratio (LCR) requirement. We find that, in becoming LCR compliant, banks initially ramped up their stock of reserve balances. However, once the requirement was met, some banks subsequently shifted the compositions of their liquid portfolios significantly. This raises the question: What drives the compositions of banks’ HQLA? We show that a risk-return framework can account for a range of potential portfolio compositions depending on banks’ tolerance for interest rate risk. And, our data indicate that banks have indeed adopted a range of portfolio compositions, with some components exhibiting a high degree of daily variance. These findings lead us to conclude that about half of large banks are largely focused on risk-return conside rations in managing the compositions of their HQLA pools while the other half appear bound by other factors. We highlight the importance of our findings for both the transmission and implementation of monetary policy.

Keywords: HQLA, LCR, Bank balance sheets, Liquid assets, Liquidity management, Reserve balances

JEL Classification: E51, E58, G21, G28

Suggested Citation

Ihrig, Jane E. and Kumbhat, Ashish and Vojtech, Cindy M. and Weinbach, Gretchen C. and Vojtech, Cindy M., How Have Banks Been Managing the Composition of High-Quality Liquid Assets? (2017-08-30). FEDS Working Paper No. 2017-092. Available at SSRN: https://ssrn.com/abstract=3030643 or http://dx.doi.org/10.17016/FEDS.2017.092r1

Jane E. Ihrig (Contact Author)

Federal Reserve Board - International Financial Transactions ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-3372 (Phone)
202-736-5638 (Fax)

Ashish Kumbhat

Board of Governors of the Federal Reserve System

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

Cindy M. Vojtech

affiliation not provided to SSRN

No Address Available

Gretchen Cope Weinbach

Federal Reserve Board ( email )

United States
202-452-2841 (Phone)

Cindy M. Vojtech

Board of Governors of the Federal Reserve System ( email )

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

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