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

93 Pages Posted: 6 Dec 2019 Last revised: 13 Dec 2019

See all articles by Jane E. Ihrig

Jane E. Ihrig

Board of Governors of the Federal Reserve System

Cindy M. Vojtech

Board of Governors of the Federal Reserve System

Gretchen C. Weinbach

Board of Governors of the Federal Reserve System

Date Written: 2019

Abstract

Banks? liquidity management practices are fundamental to understanding the implementation and transmission of monetary policy. Since the Global Financial Crisis of 2007-09, these practices have been shaped importantly by the liquidity coverage ratio requirement. Given the lack of public data on how banks have been meeting this requirement, we construct estimates of U.S. banks? high-quality liquid assets (HQLA) and examine how banks have managed these assets since the crisis. We find that banks have adopted a wide range of HQLA compositions and show that this empirical finding is consistent with a risk-return framework that hinges on banks? aversion to liquidity and interest rate risks. We discuss how various regulations and business model choices can drive HQLA compositions in general, and connect many of the specific compositions we see to banks? own public statements regarding their liquidity strategies. Finally, we highlight how banks? preferences for the share of HQLA met with reserves affect the Fed?s monetary policy implementation framework.

JEL Classification: E51, E58, G21, G28

Suggested Citation

Ihrig, Jane E. and Vojtech, Cindy M. and Weinbach, Gretchen Cope, How Have Banks Been Managing the Composition of High-Quality Liquid Assets? (2019). Available at SSRN: https://ssrn.com/abstract=3494163 or http://dx.doi.org/10.20955/r.101.177-201

Jane E. Ihrig (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Cindy M. Vojtech

Board of Governors of the Federal Reserve System ( email )

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

HOME PAGE: http://https://www.federalreserve.gov/econres/cindy-m-vojtech.htm

Gretchen Cope Weinbach

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2841 (Phone)

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