U.S. Banks and Global Liquidity

88 Pages Posted: 1 Jul 2020

See all articles by Ricardo Correa

Ricardo Correa

Board of Governors of the Federal Reserve System

Wenxin Du

University of Chicago Booth School of Business

Gordon Liao

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: June 29, 2020

Abstract

We characterize how U.S. global systemically important banks (GSIBs) supply short-term dollar liquidity in repo and foreign exchange swap markets in the post-Global Financial Crisis regulatory environment and serve as the "lenders-of-second-to-last-resort". Using daily supervisory bank balance sheet information, we find that U.S. GSIBs modestly increase their dollar liquidity provision in response to dollar funding shortages, particularly at period-ends, when the U.S. Treasury General Account balance increases, and during the balance sheet taper of the Federal Reserve. The increase in the dollar liquidity provision is mainly financed by reducing excess reserve balances at the Federal Reserve. Intra-firm transfers between depository institutions and broker-dealer subsidiaries within the same bank holding company are crucial to this type of "reserve-draining" intermediation. Finally, we discuss factors that contributed to the repo spike in September 2019 and the subsequent response of U.S. GSIBs to recent policy interventions by the Federal Reserve.

Keywords: Liquidity, Global Banks, Repos, Reserves, Covered Interest Rate Parity

JEL Classification: G2, F3, E4

Suggested Citation

Correa, Ricardo and Du, Wenxin and Liao, Gordon, U.S. Banks and Global Liquidity (June 29, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-89, Available at SSRN: https://ssrn.com/abstract=3638658 or http://dx.doi.org/10.2139/ssrn.3638658

Ricardo Correa

Board of Governors of the Federal Reserve System ( email )

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

Wenxin Du (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://https://sites.google.com/site/wenxindu/

Gordon Liao

Board of Governors of the Federal Reserve System ( email )

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

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