Working Paper: NBER ID: w27491
Authors: Ricardo Correa; Wenxin Du; Gordon Y. Liao
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; dollar funding; banks; repo markets; foreign exchange swaps
JEL Codes: E4; F3; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| U.S. G-SIBs' liquidity provision (F65) | dollar funding shortages (F65) |
| quarter-end events (G14) | reserve balances (E58) |
| quarter-end events (G14) | reverse repo positions (E49) |
| quarter-end events (G14) | FX swap lending (G15) |
| TGA balance (D50) | reserve balances (E58) |
| TGA balance (D50) | net repo lending (G21) |
| TGA balance (D50) | FX lending (F31) |