U.S. Banks and Global Liquidity

67 Pages Posted: 13 Aug 2020 Last revised: 18 Nov 2021

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: July 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.

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Suggested Citation

Correa, Ricardo and Du, Wenxin and Liao, Gordon, U.S. Banks and Global Liquidity (July 2020). NBER Working Paper No. w27491, Available at SSRN: https://ssrn.com/abstract=3672861 or http://dx.doi.org/10.2139/ssrn.3672861

Ricardo Correa (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Wenxin Du

University of Chicago Booth School of Business ( email )

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

Gordon Liao

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States

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