Reserves Were Not So Ample After All∗

61 Pages Posted: 9 Aug 2022

See all articles by Adam M. Copeland

Adam M. Copeland

Federal Reserve Bank of New York

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Canadian Derivatives Institute

Yilin (David) Yang

City University of Hong Kong (CityU) - Department of Economics & Finance

Date Written: July 30, 2022

Abstract

The Federal Reserve’s 'balance-sheet normalization', which reduced aggregate reserves between 2017 and September 2019, increased repo rate distortions, the severity of rate spikes, and intraday payment timing stresses, culminating with a significant disruption in Treasury repo markets in mid-September 2019. We show that repo rates rose above efficient-market levels when the total reserve balances held at the Federal Reserve by the largest repo-active bank holding companies declined and that repo rate spikes are strongly associated with delayed intraday payments of reserves to these large bank holding companies. Intraday payment timing stresses are magnified by early-morning settlement of Treasury security issuances. Substantially higher aggregate levels of reserves than existed in the period leading up to September 2019 would likely have eliminated most or all of these payment timing stresses and repo rate spikes.

Keywords: Repo rates, reserves, Treasuries, payments, central-bank balance sheet

JEL Classification: G14, D47, D82

Suggested Citation

Copeland, Adam M. and Duffie, James Darrell and Yang, Yilin (David), Reserves Were Not So Ample After All∗ (July 30, 2022). Stanford University Graduate School of Business Research Paper No. 4185217, Available at SSRN: https://ssrn.com/abstract=4185217 or http://dx.doi.org/10.2139/ssrn.4185217

Adam M. Copeland (Contact Author)

Federal Reserve Bank of New York ( email )

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James Darrell Duffie

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Canadian Derivatives Institute ( email )

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Canada

Yilin (David) Yang

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

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Kowloon
Hong Kong

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