What are federal funds how are they recorded on the balance sheets of commercial banks

QE and bank balance sheets:  

the American experience  

Céline Choulet  

At the start of the year, the European Central Bank securitisations coupled with reduced tendency to rely on  

launched a quantitative easing programme, consisting of US money-market funds), resident banks modified the  

purchases of government bonds in the secondary “natural” effect of quantitative easing on the size of their  

market. Such an approach is intended to counter balance sheets, with some of them (US-chartered  

deflationary pressures, as it tends to increase directly banks) reducing it, while others (US branches of foreign  

the money supply (mainly resident customers’ deposits) banks) increased it. These strategies are reflected in the  

and thus to offset the lack of bank lending, the usual contrasting movements in the net due of resident banks  

conduit of monetary creation. Since only credit to their subsidiaries, branches or parent companies  

institutions hold accounts with the central bank, any established outside the United States. The result is a  

purchase of assets by the central bank transits through shift in the ownership structure of reserves with the Fed,  

the balance sheet of a bank and therefore automatically with no equivalent distortion of the customer deposits on  

swells the monetary base (banknotes, coins, credit the liabilities side of banks’ balance sheets. As the  

institutions’ reserves with the central bank). When the balance sheet adjustments of some offset those of  

central bank buys securities from an insurance others, the resultant net effect at aggregate level may  

company, a pension fund, or any other non-bank agent, have disguised these opposing strategies. The Fed’s  

the commercial bank, which plays the role of measures to drain off excess reserves introduced at the  

intermediary, credits the account of its client (money end of 2013 should rebalance the ownership structure of  

supply) and sees its reserves with the central bank reserves.  

credited by the same mount (monetary base). A  

quantitative easing programme will therefore have a  

significant impact on bank balance sheets.  

The US quantitative easing experience is instructive Quantitative easing and banks’  

in at least two respects: not only does it provide a  

balance sheets: the mechanics  

pedagogical illustration of these mechanisms, but it also  

demonstrates that the effects of such an approach may  

In the United States, the Federal Reserve (Fed)  

maintained a quantitative easing (QE) policy for nearly  

six years (from December 2008 until March 2010, from  

November 2010 until June 2011, from October 2012  

until October 2014), consisting of three waves of asset  

purchases (US Treasuries, debt securities and  

mortgage-backed securities – MBSs – issued by the  

Agencies ) in the secondary market . This policy  

automatically inflated the central bank’s balance sheet,  

boosting its securities portfolio on the assets side and  

the current accounts of resident banks on its liabilities  

not be as automatic and uniform as expected. In this  

article, we analyse how the tightening of banking  

regulations and aversion towards securitised products  

have distorted the effects of quantitative easing on the  

balance sheets of US resident banks. We therefore build  

on the work of Ennis and Wolman (2012), Goulding and  

Nolle (2012, Kreicher, McCauley and McGuire (2013),  

and McCauley and McGuire (2014).  

For various reasons (change of method for  

calculating the premium paid to the deposit insurance  

fund, foreign banks’ decreased appetite for US  

July-August 2015  

Conjoncture  

3

side (chart 1). The banks’ reserves with the Fed  

therefore showed large surpluses compared with  

minimum requirements (according to monetary policy ):  

QE has swollen US resident banks' reserves at Fed  

3000 USD bn  

since the start of 2009, reserves in excess of reserve  

requirements represent around 95% of banks’ current  

accounts with the Fed. These purchases also  

contributed to the strong growth in customer deposits  

with the banks.  

2

2

500  

000  

1500  

000  

1

5

00  

0

Substantial excess reserves with the central bank  

2

006  

2009  

2012  

2015  

US resident banks participated more widely in QE as  

intermediaries on behalf of their customers, and were only  

marginally involved in the sale of securities held on their  

balance sheets. Throughout the entire period of the Fed’s  

quantitative easing programme, they even expanded their  

portfolios of Treasuries and Agencies. If the banks  

themselves had sold their securities portfolios, QE would  

simply have resulted in the conversion of assets on their  

balance sheets (securities against reserves with the Fed),  

with no impact on the size of their balance sheets  

Chart 1  

Source: Federal Reserve  

Breakdown of Treasuries by ownership sector  

%

of total outstanding  

change in ownership, % points12  

50%  

0%  

30%  

4

Sept 2008  

Dec 2014  

Change  

10  

8

6

4

2

(example 1, figure 1) or on the money stock in circulation.  

2

1

0%  

0%  

0%  

Yet, from the end of the third quarter of 2008 until the  

fourth quarter of 2014, it was mainly US households  

0

-

-

-

-

10%  

20%  

30%  

40%  

-2  

(which, in US statistics, include hedge funds and private  

-4  

-6  

-8  

equity funds), the States and local authorities, non-bank  

financial institutions, notably Government-Sponsored  

Enterprises (GSEs) and money-market funds, and non-  

residents that reduced their holdings of Treasuries  

and/or Agencies (charts 2 and 3). As these agents  

Chart 2  

Source: Federal Reserve  

(apart from the GSEs) do not have accounts with the  

Fed, the transactions were executed via banks’ balance  

sheets: to settle its purchases (increase in securities  

held on the asset side of its balance sheet), the Fed  

credited the banks’ current accounts (buildup in banks’  

excess reserves in the Fed’s liabilities and in the assets  

side of the banks’ balance sheets), while the banks  

credited their customers’ accounts (increase in deposits  

on the liabilities side of banks’ balance sheets) (example  

Change in ownership of Agency debt and MBS  

USD bn)  

(

Change between  

Sept. 2008 & Dec. 2014  

Broker-dealers  

ABS issuers & REITS  

GSEs  

2, figure 1). All other things being equal, the Fed’s QE  

Mutual funds  

Pension funds  

Banks  

therefore tended to increase the size of the resident  

banks’ balance sheets, by increasing their deposits with  

the central bank and their debts to customers. Whereas  

the eurozone quantitative easing programme that started  

at the beginning of this year came in a context where  

banks’ excess reserves were being taxed (0.20% penalty  

applied to reserves in excess of required reserves), the  

Fed has been paying interest on excess reserves at a rate  

of 0.25% since 2008.  

Money market funds  

Insurers  

Fed  

Rest of the world  

States & Local govt.  

Households  

-1000  

-500  

0

500  

1000  

1500  

2000  

Chart 3  

Source: Federal Reserve  

July-August 2015  

Conjoncture  

4

Impact of Large Scale Asset Purchases on balance sheets  

Example 1: the commercial bank sells 10 securities units to the central bank  

Central Bank  

Commercial Bank  

Customer  

Assets Liabilities  

Assets  

Securities +10  

Liabilities  

Assets  

Liabilities  

Reserves +10  

Securities -10  

Reserves +10  

Total assets: +10  

Total assets: no change  

Example 2: the commercial bank acts as an intermediary on behalf of its customer (the customer sells 10 securities units to the central bank)  

Central Bank Commercial Bank Customer  

Liabilities  

Assets  

Securities +10  

Liabilities  

Assets  

Reserves +10  

Liabilities  

Assets  

Reserves +10  

Deposits +10  

Securities -10  

Deposits +10  

Total assets: +10  

Total assets: +10  

Figure 1  

In the United States, QE ultimately inflated the contracted temporarily (redemption or cancellation of  

monetary base (banknotes, coins, credit institutions’ mortgage loans, fall in production of new loans),  

reserves with the central bank), but also the money deposits continued to grow rapidly (chart 4). The money  

supply (increase in residents’ deposits), a second effect (deposits) created under quantitative easing  

that would have been less noticeable if just the banks, disconnected the stock of loans from the stock of bank  

the GSEs (which have accounts with the Fed) and non- deposits. This phenomenon can be very simply  

residents (whose deposits are not included in the money illustrated by adding to the bank loans outstanding the  

supply) had sold their securities.  

counterpart of the additional deposits created under QE,  

i.e. the banks’ excess reserves with the Fed (dotted  

curve in chart 4) (Coppola, 2014).  

Constant growth in deposits despite credit contraction  

As the banks mainly acted as intermediaries, the  

Fed’s purchases of securities broke the link that  

QE has uncoupled stocks of loans and bank  

deposits  

normally exists, even in an open economy, between  

USD bn, balance sheet figures for commercial banks  

(

non-securitised) loans and bank deposits (excluding  

12000  

Deposits  

10000  

interbank debts and loans). In normal times, at the level  

of a national banking system, this close relationship  

stems from the specific characteristics of financing via  

bank loans: when a bank grants a loan, it creates a new  

deposit at the same time. In other words, it creates  

money by crediting its customer’s account. This deposit  

may “travel” towards a current account held by the  

customer of a different bank (e.g. when the borrower  

buys a car from the customer of another bank), but at  

aggregate level, loans and deposits outstanding remain  

Loans retained on balance sheets  

8

6

4

2

000  

000  

000  

000  

0

Loans + excess reserves with the Fed  

QE has swollen  

deposits & reserves on  

bank balance sheets  

7

3

80  

87  

94  

01  

08  

15  

Chart 4  

Source: Federal Reserve  

in balance (leaving aside the conversion of deposits into Shift in the ownership structure of reserves  

banknotes, or their “leakage” abroad). In the US, the  

Fed’s quantitative easing programme undermined the  

An analysis at aggregate level of the impact of QE  

illustration of the adage that “loans create deposits”. on banks’ balance sheets nevertheless masks some  

From the end of 2008, while banks’ outstanding loans major disparities between resident establishments .  

July-August 2015  

Conjoncture  

5

Based on an analysis of individual data, Ennis and  

Wolman (2012) showed that the different monetary  

Stable resources grew twice as  

policy measures implemented by the Fed (loans to fast as reserves on US banks’  

establishments at the end of 2008, first and second  

waves of securities purchases) had led to a shift in the  

balance sheets  

ownership structure of reserves within the resident  

As we mentioned above, purchases of securities by a  

banking sector. In fact, while they accounted for less  

central bank may be accompanied by an increase in the  

than 10% of bank assets in September 2008, US  

level of resources considered the most stable (deposits) on  

branches of foreign banks captured 40% of the  

banks’ balance sheets, but also by an increase in the size  

of banks’ balance sheets. According to Ennis and Wolman  

additional reserves created throughout the period of QE  

(from Q3 2008 until Q4 2014), but just 8% of deposits  

(2012) and Kreicher, McCauley and McGuire (2013), this  

(chart 5).  

second effect became problematic for US-chartered banks  

during the second phase of quantitative easing (QE2):  

when the Fed announced in November 2010 its intention to  

buy an additional 600 billion dollars of Treasuries in the  

secondary market, the FDIC at the same time expanded  

the basis for calculating the premium paid by affiliated  

banks (in accordance with the recommendations of the  

Dodd Frank Act). From April 2011, the calculation basis  

was extended to all the deposit-taking institution ’s liabilities  

US branches of foreign banks have captured  

0% of the excess reserves created by the Fed  

4

4

4

3

3

2

2

1

1

5% Weight of US branches of foreign banks  

in resident banking sector  

0%  

5%  

As % of financial assets  

0%  

As % of reserves at Fed  

5%  

(excluding shareholders’ funds) as against just resident  

0%  

5%  

0%  

As % of client deposits  

customers’ deposits previously. In addition, the premium  

rate became dependent on the bank’s financial solidity  

(CAMEL rating) and debt structure. Thus, the FDIC ’s new  

premium calculation rule reinforced the leverage constraint  

by increasing the regulatory costs associated with balance  

sheet size just when a new wave of asset purchases was  

being launched. Kreicher, McCauley and McGuire (2013)  

demonstrated that the effects of the size and structure of  

5

0

%

%

avg.2000-2007  

avg.2008-2015  

Chart 5  

Source: Federal Reserve  

For various reasons (changed method for the balance sheet had played more strongly to the  

calculating premium paid to deposit insurance fund disadvantage of the big banks, which tried to reduce their  

(FDIC), decreased appetite for US securitisations, reliance on wholesale funding. For our part, we interpret  

desire to reduce dependency on US money-market QE2 as an opportunity for the US-chartered banks to repay  

funds, etc.) the US resident banks modified the loans from their foreign subsidiaries and branches, and thus  

“natural” effect of QE on the size of their balance to reduce the cost of the deposit insurance.  

sheets (as described above): the US-chartered banks  

attenuated the effect (second part of this article), while Regulatory arbitrage and Eurodollar market  

the US branches of foreign banks intensified it (third  

part). These strategies are reflected in the contrasting  

Since the 1970s, the big US-chartered banks have  

movements in the intragroup net debt of resident been transferring part of the deposits they take from  

banks compared with their branches or parent corporations or funds to their branches outside the  

companies established outside the United States. As United States, generally in London or the Caribbean  

the adjustments of some offset the adjustments of (Kreicher, 1982). These transfers represented a form of  

others, the resultant net effect at aggregate level regulatory arbitrage comparable to that which triggered  

disguises these opposing trends (fourth part). The credit disintermediation, and they underpinned a rise in  

Fed’s measures to drain off excess reserves the Eurodollar market (dollar-denominated deposits on  

(

according to monetary policy) introduced at the end of the balance sheet of a bank established outside the  

2

013 should rebalance the ownership structure of United States or an International Banking Facility )  

reserves (fifth part).  

(Goodfriend, 1998; He and McCauley, 2012). The  

July-August 2015  

Conjoncture  

6

branch booked this deposit as a liability with regard to its The effects of changing the FDIC premium calculation  

customer and as asset with regard to its parent  

company in the United States. The latter booked a  

At the end of 2010, the enlargement of the calculation  

liability with regard to its branch and increased its basis to total assets and the introduction of a penalty in  

reserves with the Fed (Windecker, 1993). Once proportion to their reliance on wholesale funding prompted  

transferred, such deposits eluded Regulation Q on the the banks to repay their debts to their foreign subsidiaries or  

payment of interest on deposits (interest ceiling on branches. Since intergroup loans had fallen within the scope  

savings accounts and term deposits until 1986 and ban of the resources used to calculate the premium, there was  

on paying interest on demand deposits until 2011), and less justification for US-chartered banks to replace customer  

reserve requirements. In addition, they were removed deposits with intragroup debts. The launch of QE2, and the  

from the calculation basis for the premium paid to the boost to reserves that it triggered, enabled the US-chartered  

FDIC. This transaction enabled US-chartered banks to banks to repay this debt. The decline in intragroup debt was  

remain competitive with the high returns offered by the accompanied by an increase in deposits held on the balance  

non-banks (notably the mutual funds in the 1970s and sheet (“destruction” or repatriation of Eurodollars), specifically  

1980s) and to improve their net margin on resources by at the big banks. Based on data from the Bank for  

reducing the regulatory costs associated with deposit International Settlements (BIS) and the FFIEC ’s Call Reports,  

taking. This boosted the net debtor position of the US- McCauley and McGuire (2014) demonstrated that, in a  

chartered banks to their foreign subsidiaries and symmetrical fashion, the dollar exposure of their foreign  

branches (charts 6 and 7).  

subsidiaries or branches (deposits net of loans to customers)  

declined significantly between the start of 2011 and the end  

of 2012. In October 2012, the net debt of US-chartered banks  

to their corresponding foreign entities was virtually zero,  

compared with around 590 billion dollars at its peak in  

September 2009. In just three years, the US-chartered  

commercial banks therefore repaid debts that had been  

accumulating over nearly thirteen years (chart 7). For the  

same reasons (FDIC premium, leverage constraint, reserves  

in excess of reserve requirements), activity in the federal  

Transactions of US-chartered banks with foreign  

affiliates  

9

8

7

6

5

4

3

2

1

00 USD bn  

00  

Due to foreign affiliates  

00  

00  

00  

00  

00  

00  

00  

0

Due from foreign affiliates  

funds market dried up, particularly in the interbank market  

(non-collateralised or collateralised). Ultimately, the effect of  

quantitative easing on the US-chartered banks was that  

growth in deposits (net of loans) was twice as fast as growth  

in reserves (charts 8 and 9). The result was an increase in  

deposits as a percentage of US-chartered commercial banks’  

total assets, well above European levels (chart 10).  

8

6

90  

94  

98  

02  

06  

10  

14  

Chart 6  

Source: Federal Reserve  

US-chartered banks' net funding inflows from  

offices abroad  

Financial assets of US-chartered commercial banks  

7

6

5

4

3

2

1

00 USD bn, net due to related foreign offices  

USD bn  

USD bn  

2

500  

Reserves with the Fed  

Total assets  

Loans*  

16000  

14000  

2000  

10000  

00  

00  

00  

00  

00  

00  

0

Lending on Fed Funds  

& repo markets*  

2000  

1

Treasuries & Agencies  

Other assets  

Private debt securities  

1

1

500  

000  

Interbank loans (incl. affiliated  

foreign banks)  

8

6

4

2

0

000  

000  

000  

000  

5

00  

0

7

5

80  

NB: a figure greater than 0 indicates that US banks are net  

borrowers from their foreign subsidiaries and branches  

Source: Federal Reserve  

85  

90  

95  

00  

05  

10  

15  

-

-

100  

200  

80  

85  

90  

95  

00  

05  

10  

15  

*

Excluding interbank loans  

Chart 7  

Chart 8  

Source: Federal reserve  

July-August 2015  

Conjoncture  

7

Financial liabilities of US-chartered commercial  

banks  

The US branches of foreign banks  

12000 have captured 40% of the excess  

USD bn  

USD bn  

2

1

1

000  

600  

200  

Interbank debt (including affiliated foreign banks)  

1

8

6

4

2

0

0000  

000  

000  

000  

000  

Borrowing on Fed Funds & repo markets*  

reserves created by QE  

FHLB loans  

Deposits  

Other liabilities  

8

4

00  

00  

0

The second phase of quantitative easing was  

accompanied by a shift in the ownership structure of  

reserves at the central bank (chart 11) without an  

equivalent shift in the ownership structure of deposits  

(chart 5). In March 2011, the US branches of foreign  

banks held 640 billion dollars of reserves (40% of their  

balance sheet), double the level of the previous year.  

The weight of their reserves jumped to 46% of the  

reserves of all deposit-taking institutions (40% on  

80  

85  

90  

95  

00  

05  

10  

15  

*

Excluding interbank borrowings  

Chart 9  

Source: Federal Reserve  

Deposits cover 3/4 of US commercial bank assets  

Deposits as a % of total assets (excl. interbank loans)  

8

5%  

0%  

5%  

0%  

5%  

0%  

5%  

average between 2008 and 2014) compared with 2%  

in June 2008 (4% on average between 2000 and  

8

7

7

6

6

5

2007), a level disproportionate to their weight in total  

bank assets (11% in March 2011 vs 10% three years  

earlier).  

Shift in the ownership structure of reserves  

7

5

80  

85  

90  

95  

00  

05  

10  

15  

Chart 10  

Source: Federal Reserve  

USD bn  

USD bn  

1600  

400  

Deposit-taking Institutions  

US-chartered banks  

3

000  

500  

000  

RRF & TDF  

1

2

2

In striving to minimise the cost of the FDIC  

premium, the US-chartered banks dampened the impact  

of QE on their stock of reserves and the size of their  

balance sheets. This was not the case for the US  

branches of foreign banks, which are mostly not  

affiliated to the deposit insurance system, as they do not  

take deposits from retail customers (see box) and are  

therefore not required to pay the FDIC premium.  

US branches of foreign banks  

1200  

1000  

800  

QE 3  

1500  

1000  

Extension  

of QE 1  

QE 2  

6

00  

Fed lending to banks &  

start of QE 1  

400  

200  

0

5

00  

0

0

0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15  

Chart 11 Source: Federal Reserve  

Box: Foreign banks’ branches in US statistics  

International banks establish their activities abroad via subsidiaries or branches. Subsidiaries are corporate  

entities that are legally distinct from their parent and are generally regulated and supervised by the authorities of the  

host country, which is not the case for branches. Some countries restrict the activities of foreign banks’ branches  

located in their territory, the United States being an example (see below). Canadian, UK, Japanese, French and  

German institutions are among the largest foreign banks operating in US territory.  

In the Fed’s statistics, the financial accounts of US depository institutions (the equivalent of credit institutions in  

the eurozone) are established on a parent-company basis according to the residency principle. It follows that only the  

financial assets (and liabilities) of deposit-taking institutions that are resident in US territory are entered in the  

July-August 2015  

Conjoncture  

8

accounts (even if these institutions are controlled by foreign banks). The uses (and sources) of the banks affiliated to  

them (parents, subsidiaries or branches) but located outside the United States, together with the assets (and  

liabilities) of other non-resident agents, form the “Rest of the World” sector. The accounts of each of the institutional  

sectors are consolidated (eg the credits and debts between resident commercial banks are netted). The data  

published by the Fed (Financial Accounts of the United States, Table H8) enable us to distinguish two types of  

commercial bank within the resident banking sector: 1) banks governed by US law (a subsector encompassing US-  

chartered banks and US subsidiaries of foreign banks) and 2) the US branches of foreign banks.  

The Fed does not draw up a separate account for the US subsidiaries of foreign banks. Nevertheless, based on  

data from the FFIEC’s Call Reports, Goulding and Nolle (2012) note that their balance sheet structure is fairly similar  

to that of the US-chartered commercial banks (unlike the branches: see below). Moreover, they represent a much  

smaller share than the branches, accounting for one-third of the assets of foreign banks with a presence in the US,  

compared with two-thirds for branches.  

In the United States, with a few exceptions , the branches of foreign banks are not affiliated to the FDIC: they  

are not authorised to take deposits from retail customers and the deposits of their clients (corporates) are not  

guaranteed. These establishments obtain their funding mainly from the wholesale markets, i.e. with resources  

considered to be less stable than retail customers’ deposits. Therefore, while deposits remain the main source of  

funding for branches, as with the US-chartered banks, 80% of them consist of deposits that exceed the guarantee  

limit (250 billion dollars) compared with less than 10% at the US-chartered banks. The rest of their debt consists of  

loans from the fed funds market or the collateralised loan market (repurchase agreements or repos: cash loans in  

exchange for securities with an obligation to buy them back in the future). Their loan portfolios are therefore more  

oriented towards corporate clients (since the start of the 2000 decade, commercial and industrial loans outstanding  

have on average accounted for 90% of their loan portfolios in the non-financial sector). Like the US-chartered  

commercial banks, they can refinance themselves from the Federal Reserve and they have a current account.  

A means of access to the dollar  

According to BIS statistics, foreign banks’ loans to December 1999 and June 2008. These practices added  

US residents (based on their consolidated balance to the “round trip” of dollar funds (He and McCauley,  

sheets) amounted to more than 6,000 billion dollars 2012) and helped to inflate the balance sheets of  

before the financial crisis (McCauley and McGuire, branches located in the US. The less severe regulatory  

2

014). Some of the European banks among them were framework of the time (Basel 2) and the lack of  

raising funds in dollars from US money-market funds constraints on size or leverage for banks regulated  

mainly in the form of certificates of deposit and outside the US may have contributed to this process.  

(

commercial paper) via their US branches in order to  

minimise their exposure to exchange rate risks (Baba,  

McCauley and Ramaswamy, 2009). These funds were  

invested in long-term securities or securitisations  

Transactions of US branches of foreign banks  

with foreign affiliates  

1

400 USD bn  

1

1

200  

(securities backed by mortgages, car loans, credit cards,  

Due to foreign affiliates  

Due from foreign affiliates  

000  

800  

student loans, etc.).  

From the start of the 2000 decade, net loans from  

branches to their parents gradually increased, reaching  

6

4

2

00  

00  

00  

0

600 billion dollars in mid-2008, i.e. 49% of the  

aggregated balance sheets (excluding interbank loans)  

of these institutions 12 (charts 12, 13 and 14). In a  

symmetrical fashion, the deposits taken by these  

branches grew by around 685 billion dollars between  

8

6

90  

94  

98  

02  

06  

10  

14  

Chart 12  

Source: Federal Reserve  

July-August 2015  

Conjoncture  

9

Financial assets of US branches of foreign banks  

Reduced use of money market funds has  

temporarily obscured effects of QE on deposits  

USD bn  

USD bn  

Total assets  

600 USD bn  

USD bn  

Inverted scale  

0

2

1

1

1

1

600  

400  

200  

000  

3500  

000  

2500  

000  

1500  

Reserves with the Fed  

Lending on Fed Funds &  

repo markets*  

3

400  

00  

Net due to related foreign offices  

Treasuries & Agencies  

200  

0

400  

Other assets  

Private debt securities  

2

800  

600  

400  

200  

0

Interbank loans (including with  

affiliated foreign banks)  

00  

02  

04  

06  

08  

10  

12  

14  

600  

Loans*  

-200  

1

5

0

000  

800  

-

400  

00  

Term deposits  

250 USD bn  

>

1000  

-600  

80  

85  

90  

95  

00  

05  

10  

15  

NB: a figure less than 0 indicates that US branches  

are net lenders to foreign parent companies  

*

Excluding interbank loans  

-800  

1200  

Chart 13  

Source: Federal Reserve  

Chart 15  

Source: Federal Reserve  

Financial liabilities of US branches of foreign banks  

Net debt of US branches of foreign banks and  

Fed reserves  

USD bn  

500 USD bn  

USD bn 1200  

1

1

1

1

600  

400  

200  

000  

Interbank debt (including affiliated foreign banks)  

300  

Net due to foreign affiliates  

1000  

800  

600  

400  

200  

0

Deposits  

Borrowing on Fed Funds & repo markets*  

Other liabilities  

1

00  

8

6

4

2

00  

00  

00  

00  

0

100 00  

03  

06  

09  

12  

15  

-

-300  

Reserves  

with the Fed  

of US branches  

-

-

500  

700  

80  

85  

Excluding interbank borrowings  

Chart 14  

90  

95  

00  

05  

10  

15  

*

Source: Federal Reserve  

Chart 16  

Source: Federal Reserve  

From net lenders to net borrowers  

These mechanisms can be illustrated by a graph  

such as shown in chart 4 above. In contrast to what may  

However, starting in 2011, the net position of be observed at aggregate level, simply accounting for the  

branches vis-à-vis their parents changed radically: reserves created by QE does not enable us to reconcile  

having been net lenders, they became net borrowers. the trend in loans and deposits booked in the balance  

In one year, in absolute terms, their net position sheets of foreign banks’ branches (chart 17). Obviously,  

contracted by 512 billion dollars, from a net credit of the deposits created by a new loan (or by QE) move from  

376 billion in December 2010 to a net debt of 130 one bank’s balance sheet to another’s, or from one  

billion in December 2011. The result was less recourse institution to another; but in the case of branches, a clear  

to money-market funds, which may have obscured the disconnect between the deposits and loans on their  

effect of QE on their customers’ deposits: the deposits balance sheets emerged at the start of the 2000 decade,  

booked on the liabilities side of their balance sheets i.e. from the moment when they increased their net credit  

therefore evolved fairly erratically and only really position vis-à-vis their parent companies (and financed  

started to grow in 2012 (chart 15). From 2011, the these loans by borrowing from money-market funds,  

branches amplified the effect of QE on their stock of mainly). Thus, the trends in loans and deposits on the  

reserves by borrowing from their parents (chart 16). balance sheets of branches may be reconciled, at least  

Thus, while the branches had captured one-third of the until just before quantitative easing, by adding to the loans  

reserves created in QE1, this proportion rose to more the counterpart of the liquidity lent to the parent  

than 50% in QE2 (more than two-thirds from companies, i.e. the branches’ net loans to their parent  

September 2010 to September 2012).  

companies (chart 18). From 2008, accounting for the  

July-August 2015  

Conjoncture  

10  

counterpart of deposits created in the context of QE, and  

While foreign banks’ US branches all substantially  

from 2011 for liquidity borrowed from parent companies, increased their reserves with the Fed from 2011  

gives a more coherent picture of the respective trends for (particularly branches of Japanese, Swiss and UK  

loans and deposits (chart 19).  

banks) and reduced their net loans to their parents,  

only the branches of eurozone banks reduced their  

balance sheets and became net borrowers from their  

parents (Kreicher, McCauley and McGuire (2013),  

McCauley and McGuire (2014)). At the European  

banks, a reduced appetite for US securitisations, the  

Fed’s securities purchase programme, a desire to  

reduce dependency on money-market funds (whose  

funding proved unstable when the financial crisis  

broke), as well as a desire to boost dollar-denominated  

liquid assets, led to a deleveraging of bank balance  

sheets in dollars (at both branch level and  

consolidated level) and a shift in the assets held by the  

branches (in favour of reserves with the Fed).  

Therefore, while other factors may also have played a  

Simply accounting for reserves does not allow  

the reconciliation of stocks of loans and deposits  

1

1

1

1

1

800 USD bn, balance sheet amounts at US branches  

of foreign banks  

600  

400  

200  

000  

Deposits  

Loans retained on balance sheet  

Loans + Fed reserves  

8

6

4

2

00  

00  

00  

00  

0

7

5

80  

85  

90  

95  

00  

05  

10  

15  

Chart 17  

Source: Federal Reserve  

role , it seems that foreign banks’ reduced reliance on  

the resources raised by their branches has been  

accompanied by a contraction in the securitisation  

portfolios held by non-residents (chart 20).  

Unsurprisingly, however, the orders of magnitude are  

very different: first, because the foreign banks had not  

financed these purchases solely via their branches in  

the US; and second, because the non-resident sector  

is much larger than just the foreign banks that have US  

branches. Data collected by the US Treasury and the  

Federal Reserve on foreigners’ ownership (taking all  

counterparties together) of securities issued by US  

residents illustrates the decline in securitisation  

portfolios, particularly those held by Europeans, since  

the financial crisis (chart 21).  

The increase in net intra-group lending has uncoupled  

the stock of bank loans and deposits since 2000  

1

1

1

400 USD bn, balance sheet figures for US branches  

of foreign banks  

200  

Deposits  

000  

Loans retained on balance sheet  

8

6

4

2

00  

00  

00  

00  

0

Loans + net due to foreign affiliates  

7

5

80  

85  

90  

95  

00  

05  

10  

15  

Chart 18  

Source: Federal Reserve  

Reconciliation of outstanding loans and  

bank deposits  

Shrinking securitisation portfolios of non-residents  

1

1

1

1

600  

400  

200  

000  

USD bn  

Net funding inflows  

USD bn, balance sheet figures for US branches  

of foreign banks  

USD bn  

Inverted scale  

6

4

2

00  

00  

00  

0

0

5

00  

Deposits  

to US branches from  

their offices abroad  

1000  

Loans retained on balance sheet  

8

6

4

2

00  

00  

00  

00  

0

1

2

2

500  

000  

500  

Loans + net due to foreign  

affiliates + reserves at Fed  

-

-

200  

400  

Ownership by RoW of Agency debt,  

MBS & ABS  

-600  

-800  

3000  

7

5

80  

85  

90  

95  

00  

05  

10  

15  

80  

85  

90  

95  

00  

05  

10  

15  

Graph 19  

Source: Federal Reserve  

Chart 20  

Source: Federal Reserve  

July-August 2015  

Conjoncture  

11  

Shrinking of portfolios of US securitisations owned  

by Europeans  

short-term liquidity norm (LCR, liquidity coverage  

ratio) . This requires banks to hold enough liquid,  

unencumbered, high-quality assets to cover the net  

cash outflows triggered by a serious 30-day crisis. The  

assets considered to be the most liquid (those that can  

be converted into cash in private markets without losing  

USD bn, portfolios of US long-term debt securities  

1

000  

(excl. Treasuries) owned by Europeans  

9

8

7

6

5

4

3

2

1

00  

00  

00  

00  

00  

00  

00  

00  

00  

0

ABS (excl. MBS) from private issuers  

MBS from private issuers  

MBS from Agencies  

Agency debt  

or losing very little of – their value) include reserves at  

the central bank and debt instruments issued – or  

guaranteed – by sovereigns, such as Treasuries and  

0

6/07 06/08 06/09 06/10 06/11 06/12 06/13 06/14  

Agencies . The US-chartered banks expanded their  

portfolios of Treasuries and Agencies by nearly 320  

billion dollars between the end of 2012 and March 2015  

ABS: Asset-backed securities; MBS: Mortgage-backed securities;  

Mortgage agencies: Federal agencies (Ginnie Mae)  

&

GSEs (Fannie Mae, Freddie Mac, FHLB)  

Chart 21 Sources: US Treasury,Federal Reserve of New York,Fed  

(chart 8), purchases that they financed by borrowing  

from their foreign branches or subsidiaries (+260 billion)  

and the Federal Home Loan Banks (+90 billion)  

Net inflow of funds via crossborder (chart 9).  

All in all, the net debt of all commercial banks  

resident in the US to their parent companies,  

subsidiaries and branches abroad amounted to around  

intragroup debt  

Apart from their primary purpose (providing access  

to funding in foreign currencies, ensuring geographical  

diversification for commercial activities and investments,  

etc.), foreign branches are also factors that allow for the  

absorption or amplification of shocks. Thus, while an  

analysis of the aggregated balance sheets of resident  

banks allows us to assess the effects of quantitative  

easing on banks’ reserves and deposits (see first part of  

this article), it ignores the massive shift in net intra-group  

positions that QE has triggered.  

As the net debt of some (the US banks) offsets the  

net credits of others (the branches of foreign banks), the  

net position of US domestic commercial banks to their  

foreign parent companies, subsidiaries and branches  

remained close to zero until the end of 2010 (see area  

shown in chart 22).  

4

00 billion dollars at the start of 2015 (see area shown  

in chart 22) . Based on the consolidated balance  

sheets of foreign banks with activities in the US (FFIEC  

Call Reports) and statistics from the BIS, McCauley and  

McGuire (2014) observed that in 2011 the increase in  

net lending in dollars by foreign parent companies to  

their US branches had not been offset by a contraction  

of the same order in their net loans to any other  

counterparty (in the US or elsewhere). They deduced  

from this that this lending had been financed by  

converting foreign currency-denominated resources into  

dollars. This interpretation was confirmed by the  

increase in yen, euro and sterling swaps into dollars  

during 2011. They thus concluded that, counter-  

intuitively, the Fed’s QE had been accompanied by an  

inflow of funds via the Eurodollar market.  

Under the combined effect of quantitative easing  

and the change to the FDIC premium calculation, the  

flow of parent companies’ repayments of crossborder  

intra-group loans, which was more rapid at the  

foreign banks than at the US-chartered banks (see  

area shown in chart 6 and histogram in chart 12),  

helped to increase the net debt of all the resident  

commercial banks. This trend was prolonged by the  

net inflow of intragroup funds via the balance sheets  

of US branches of foreign banks as from 2011, and  

via those of US-chartered commercial banks as from  

Net debt of some offset by net credits of others  

over the long term  

USD  

bn  

Net debt of US resident commercial  

banks to foreign affiliated entities  

Net inflow of  

intra-group  

finance  

800  

600  

400  

200  

0

Net debt of US-chartered banks to  

foreign subsidiaries and branches  

Net debt of US branches of foreign  

banks to foreign affiliates  

-

200  

2

013 (dotted curve and solid curve in chart 22).  

-400  

NB: figures greater than 0 indicate that  

-

-

600 banks are net borrowers from foreign affiliates  

parent companies, subsidiaries, branches, other)  

80 85 90 95 00 05  

Net outflow of  

intra-group  

finance  

The trend observed since 2013 for US-chartered  

(

800  

banks (return to net debtor position) is probably not  

unrelated to the Basel Committee’s finalisation of the  

7

5

10  

15  

Chart 22  

Source: Federal Reserve  

July-August 2015  

Conjoncture  

12  

The Term Deposit Facility (TDF)  

Towards a rebalancing of the  

reserve ownership structure  

This method consists in offering to convert banks’  

reserves into term deposits (figure 2). To make this more of  

an incentive than it was when launched in September 2013,  

the Fed made a timely change as from October 2014 to the  

characteristics of the term deposits that the banks may take  

up under TDF. The initial offers had in fact been in breach of  

banking regulations: in October 2013, the proposed LCR  

short-term liquidity rule (see above) stated that term deposits  

offered under TDF would be ineligible for the range of liquid  

assets covered by the LCR. This rule, which indicated that  

part of the term deposits could meet the inclusion criteria  

provided that early withdrawals were authorised, was  

finalised in September 2014; shortly afterwards, in October,  

the Fed announced the introduction of new term deposit  

offers at 6, 7 or 8 days, but this time with early drawing rights.  

The unprecedented increase in banks’ excess  

reserves triggered by quantitative easing exerted  

downward pressure on money-market rates . Eager  

to regain control over short-term rates , the Federal  

Reserve has been testing two alternative methods for  

draining off excess reserves: the Term Deposit  

Facility (TDF) and the Reverse Repo Facility (RRF)  

since September 2013. The resulting contraction in  

reserves is only perceptible at the US branches of  

foreign banks.  

Impact of the Term Deposit Facility on balance sheets : conversion of reserves into term deposits  

Central Bank Commercial Bank  

Liabilities Assets Liabilities  

Reserves Reserves  

Term deposits +10 Term deposits +10  

Customer  

Assets Liabilities  

Assets  

-10  

-10  

Total assets: no change  

Total assets: no change  

Figure 2  

This change enables banks to participate in the The Reverse Repo Facility (RRF)  

scheme without causing deterioration (or  

a

The second method for draining off liquidity consists  

improvement) in their LCR liquidity ratio (conversion of  

reserves into term deposits). Helped by a more in performing repurchase transactions on Treasuries 20  

attractive return, the amounts converted reached 400 (sale with obligation to repurchase in future) at a fixed rate  

(

between 0.01% and 0.10%), with a cap on the amount  

billion dollars in December 2014 and again in February  

015 with an interest rate of 30bp in December and permitted (30 billion dollars per counterparty since  

2

September 2014 vs 500 million dollars initially in the case  

of overnight transactions) and with an extended list of  

counterparties: 24 deposit-taking institutions, 22 primary  

dealers, 12 GSEs and 105 money-market funds. By  

means of this facility, a bank or non-bank extends a  

guaranteed loan (cash against Treasuries) to the Fed .  

As in the case of the purchase of securities by the Fed, a  

repo transaction always (unless the counterparty is a  

GSE) passes through a bank’s balance sheet, whether  

the counterparty is a final counterparty of the Fed  

2

8bp in February, compared with 25bp for excess  

reserves (chart 23).  

Participation in the Fed's two programmes is  

substantial  

USD bn  

4

3

1

50  

00  

50  

0

Term Deposit Facility  

Reverse Repo Facility  

(example 1 in figure 3) or not (example 2 in figure 3),  

since only banks and GSEs have a current account with  

the central bank. At the end of the transaction, the size of  

the central bank’s balance sheet is unchanged, but the  

composition of its debt is different (reverse repos versus  

2

013  

2014  

2014  

2014  

2015  

reserves) and the account of its counterparty is debited  

Chart 23  

Source: Federal Reserve  

July-August 2015  

Conjoncture  

13  

(reserves of deposit-taking institutions). When a (example 1 in figure 3). When the Fed’s counterparty is a  

commercial bank itself contracts a repurchase agreement non-bank (eg a money-market fund), the commercial  

with the Fed, the transaction results simply in the bank debits its client’s account (example 2 in figure 3). All  

conversion of assets on its balance sheet (repo vs other things being equal, at the end of the transaction, the  

reserves), with no impact on the size of its balance sheet size of the bank’s balance sheet is reduced in this case.  

Impact of the Reverse Repo Facility on balance sheets  

Example 1: the commercial bank itself contracts a repurchase agreement with the central bank  

Central Bank  

Commercial Bank  

Assets Liabilities  

Repo +10  

Reserves -10  

Customer  

Liabilities  

Assets Liabilities  

Assets  

Repo +10  

Reserves -10  

Total assets: no change  

Example 2: the commercial bank acts as an intermediary on behalf of its customer (eg a money-market fund)  

Total assets: no change  

Central Bank  

Assets Liabilities  

Commercial Bank  

Customer  

Assets Liabilities  

Assets  

Reserves -10  

Liabilities  

Repo +10  

Reserves -10  

Deposits -10  

Repo +10  

Deposits -10  

Total assets: no change  

Total assets: -10  

Figure 3  

Overnight transactions have been conducted every  

While the first method (Term Deposit Facility) at best  

working day since September 2013 (the volume of each has no effect on institutions’ LCRs, the second (Reverse  

daily transaction has been capped at 300 billion dollars Repo Facility) is likely to produce opposite effects to QE on  

since September 2014). In addition, around ten term banks’ balance sheet and regulatory ratios (by reducing the  

transactions (between 1 and 4 weeks) have been volume of high-quality liquid assets according to LCR  

performed since December 2014 (the ceiling for the norms, but by alleviating the leverage constraint).  

cumulative volume of overnight and term transactions  

varies from 310 to 600 billion dollars ). The scheme will  

be tested until at least 30 January 2016. The  

transactions are generating significant levels of  

participation. On average, since September 2013, 100  

billion dollars in cash are “lent” each day to the Fed in  

overnight transactions (chart 24). Aggregating the  

overnight and term repo transactions, and given the  

limits set by the Fed, outstandings have averaged 135  

billion dollars each day since the start of December  

Strong demand for overnight reverse repo  

operations...  

USD bn, daily demand addressed to the Fed  

4

50  

3

0/09/2014  

400  

350  

3

0/06/2014  

ceiling  

3

2

2

1

1

00  

50  

00  

50  

00  

3

1/03/2014  

3

1/12/2013  

1/12/2014 31/03/2015  

3

2014. Record levels of demand have been recorded at  

5

0

the end of the quarter reflecting specific requirements  

when participants close their quarterly accounts (see  

above and chart 25).  

0

0

9/13  

02/14  

06/14  

10/14  

03/15  

Chart 24  

Source: Federal Reserve of New York  

July-August 2015  

Conjoncture  

14  

.

.. overnight reverse repo and term operations since  

MMFs - the Fed's main counterparties  

launch at end-2014  

USD bn, demand addressed to the Fed  

USD bn, participation in overnight reverse repo operations  

6

5

4

3

2

1

00  

00  

00  

00  

00  

00  

0

3

1/12/2014  

350  

300  

250  

Banks  

Primary Dealers  

GSEs  

3

1/03/2015  

3

0/09/2014  

Money Market Funds (MMFs)  

3

0/06/2014  

ceiling  

2

00  

150  

00  

3

1/03/2014  

3

1/12/2013  

1

5

0

0

0

9/13 12/13 03/14 06/14 09/14 12/14 03/15 06/15  

09/13  

12/13  

03/14  

06/14  

09/14  

12/14  

Chart 25 Sources: Federal Reserve of New York, BNP Paribas  

Chart 27  

Source: Federal Reserve of New York  

Strong participation by money-market funds (MMFs)  

Weighting of the various participants  

Since mid-October 2014, banks’ reserves with the Fed  

have tended to decline (chart 1) under the combined effect  

of TDF and RRF, and from the end of QE3 in October  

Overnight reverse repo operations  

MMFs-Gov. 58%  

51% MMFs-Prime  

(

chart 26). The Fed executes most of its reverse repo  

transactions (through the intermediary of the banks) with  

money-market funds (MMFs), which alone are incentivised  

to participate 24 (chart 27). As the transactions are  

guaranteed by Treasuries, MMFs-Government and MMFs-  

Treasury are the Fed ’s main counterparties, whereas  

MMFs-Prime , which diversify their securities portfolios  

more widely, participate more actively in end-of-quarter  

transactions (chart 28). The success of the RRF reflects not  

just money-market funds’ need to redirect their excess  

liquidity, but also the impact of banking regulation (leverage  

ratio, reliance on wholesale financing penalised by LCR  

and systemic capital surcharge). The penalty imposed on  

institutional clients’ deposits (hedge funds, private equity  

funds) announced by major US banks such as JP Morgan  

in February could redirect these depositors’ liquidity towards  

the MMFs, then from the MMFs towards the Fed, thereby  

supporting the scheme.  

42% MMFs-Gov.  

MMFs-Prime 21%  

GSEs 14%  

Primary Dealers 5%  

Banks 2%  

5% GSEs  

2

%Primary Dealers  

1

% Banks  

Average quarter ends  

(Sept 13, Dec 13, Mar 14,  

June 14, Sept 14, Dec 14)  

Average Sept 2013-Dec 2014  

Exc. quarter ends)  

(

Chart 28  

Source: Federal Reserve of New York  

Decline in the reserves of foreign banks’ branches  

In the United States, the impact of reverse repo  

transactions on reserves with the central bank is  

perceptible only via the balance sheets of foreign banks’  

branches: unlike the US-chartered banks, they have  

seen their reserves with the Fed decline since the fourth  

quarter of 2014 (chart 11). Obviously, as the LCR  

liquidity constraint also applies outside the US, foreign  

banks must strive to preserve liquid assets in the form of  

reserves at the central bank (notably in dollars, in the  

case of eurozone banks, in order to avoid the penalty).  

The implementation of reverse repo transactions with  

money-market funds should gradually reduce the shift in  

the ownership structure of reserves, however (the  

reserves of foreign banks’ branches represented 36% of  

the reserves of all deposit-taking institutions at end-  

March 2015 compared with 48% in mid-2013). At the  

end of the quarter, the additional liquidity lent by money-  

market funds to the Fed under the RRF coincides  

particularly well with the fall in short-term financing  

Draining off excess liquidity  

USD bn  

USD bn  

3

2

2

2

2

2

000  

800  

600  

400  

200  

000  

0

150  

300  

450  

600  

750  

Reserves at the Fed  

TDF+RRF (inverted scale)  

2

013  

2014  

2014  

2015  

Chart 26  

Source: Federal Reserve  

July-August 2015  

Conjoncture  

15  

(certificates of deposit, term deposits, repos) provided the foreign banks had not wanted to boost their holdings  

by these funds to European banking groups, including of dollar-denominated liquid assets. Although it is too  

their branches (chart 29).  

early to analyse the impact, it appears that this same  

type of programme will represent a challenge for the  

eurozone banks, while the new regulatory context  

(leverage constraint, G-SIB surcharge, total loss  

absorbing capacity) obliges them to trim their balance  

sheets.  

Money market fund participation in the RRF and  

9

00  

short-term financing of European banks  

8

7

6

5

00  

Exposure to European banks  

Exposure to US banks  

RRF  

00  

The repurchase programme being implemented by  

the Federal Reserve since 2013 (Reverse Repo Facility)  

opens, so to speak, an account in its balance sheet for  

money-market funds, which can deposit their excess  

liquidity there against collateral, on certain conditions  

and within limits set by the central bank. In this way, the  

Fed “freezes” the liquidity created in QE by replacing  

banks’ reserves with money-market funds’ “deposits”. It  

thereby frees up space in bank balance sheets and  

indirectly limits the role of money-market funds in the  

financing of the economy. With 48% of reserves at the  

central bank owned by foreign banks (via their US  

branches) in June 2013, the Fed is no doubt also  

indirectly aiming to adjust the shift that quantitative  

easing triggered in the ownership structure of reserves,  

and thus in the monetary base.  

00USD bn  

00  

4

4 00 00  

3 00 00  

2 00 00  

1 00 00  

3

2

1

0

0

0

9/2013 12/2013 03/2014 06/2014 09/2014 12/2014  

Chart 29  

Source: Fitch  

Completed, 30 June 2015  

celine.choulet@bnpparibas.com  

In the US, quantitative easing was accompanied at  

aggregate level by an unprecedented increase in banks’  

reserves with the central bank and in customer deposits.  

Nevertheless, an analysis of the shift in bank balance  

sheets reveals that the extra amount of stable resources  

(customer deposits) more specifically benefitted the US-  

chartered banks, while the additional liquid assets  

created (cash at the central bank) were  

disproportionately – relative to their weight in banking  

assets – captured by the US branches of foreign banks.  

Pursuing different objectives, the former repaid the  

funds borrowed from their foreign branches, while the  

latter repatriated the funds lent to the extent of  

becoming net borrowers from their parent companies.  

The result has been the effects outlined above.  

Before the Fed launched its purchasing programme,  

US-chartered banks’ intragroup net debt was of an  

equivalent amount to that of the net credit of foreign  

banks’ branches. The effects of their joint extinction  

therefore offset one another and the impact of these  

opposing strategies remained negligible at aggregate  

level. It would have been different if the basis for the  

FDIC premium calculation had not been changed, or if  

July-August 2015  

Conjoncture  

16  

References  

Baba, N., McCauley, R. and Ramaswamy, S. (2009), US dollar money market funds and non-US banks, BIS Quarterly  

Review, March 2009.  

Coppola, F. (2014), Banks don’t lend out reserves, Forbes.  

Chrystal, K. (1984), International Banking Facilities, Federal Reserve Bank of Saint Louis.  

Ennis, H. and Wolman, A. (2012), Large Excess Reserves in the US: A view from the cross-section of banks, WP 12-05,  

The Federal Reserve Bank of Richmond.  

Goodfriend, M. (1998), Eurodollars, Federal Reserve Bank of Richmond.  

Goulding, W. and Nolle, D. (2012), Foreign banks in the US: A primer, International Finance Discussion Papers, n°1064,  

Board of Governors of the Federal Reserve System.  

He, D. and McCauley, R. (2012), Eurodollar banking and currency internationalization, BIS Quarterly Review, June  

2012.  

Kreicher (1982), Eurodollar arbitrage, Federal Reserve Bank of New York, Quarterly Review, Summer 1982.  

Kreicher, L., McCauley, R. and McGuire, P. (2013), The 2011 FDIC assessment on banks’ managed liabilities: interest  

rate and balance-sheet responses, BIS WP n°413.  

McCauley, R. and McGuire, P. (2014), Non-US banks’ claims on the Federal Reserve, BIS Quarterly Review, March  

2014.  

Windecker, G. (1993), The Eurodollar Deposit Market: Strategies for Regulation, American University International Law  

Review, Vol. 9, n°1 (1993), pp. 357-384.  

July-August 2015  

Conjoncture  

17  

NOTES  

1

Agencies created by the Federal Government for the purpose of refinancing mortgage loans in the secondary market. They include  

federal agencies benefiting from an explicit guarantee from the Federal Government (such as Ginnie Mae) and private agencies (the  

Government-Sponsored Enterprises: Fannie Mae, Freddie Mac and the Federal Home Loan Banks).  

2

Cf. d’Arvisenet, P., De Lucia, C., Estiot, A. and Newhouse, C. (2012), The Maverick, the Old Lady and the Converted, Conjoncture,  

November 2012, BNP Paribas publication.  

3

According to the reserve requirement, the banks must hold reserves with the central bank in proportion to their customers’ deposits. This  

excess liquidity, according to monetary policy, may however mask a liquidity deficit according to the LCR regulatory requirement (short-  

term liquidity requirement). This is notably the case in the eurozone where the shortfall in liquid assets (which includes a wider range of  

assets than just excess reserves) amounted to 115 billion euros under LCR (data as at 30 June 2014) whereas the reserves built up at  

the ECB (in current accounts or deposit facilities) exceeded the reserve requirement by around 139 billion euros.  

4

Second-round effects may reduce or reinforce the direct effects of QE on the money supply: reduce them if for example a US hedge  

fund sells 10 securities units to the Fed and then invests its 10 units of additional deposits in securities issued by a non-resident non-  

financial company; reinforce them if for example a non-resident sells securities to the Fed and then invests its new liquidity in securities  

issued by a resident non-financial company (which sees its deposits increase). As the liquidity circulates between agents, the final holders  

of deposits created under QE are not directly identifiable.  

5

In the United States, the strong rise in loan securitisation since the 1980s has created a decorrelation between the trend in total loans  

outstanding (loans retained on banks’ balance sheets and loans sold to securitisation vehicles) and the trend in bank deposits, with part of  

the savings previously created by the bank credit having been captured by new investment products issued by the securitisation vehicles  

(

loan-backed securities).  

6

We focus our analysis on the commercial banks, which account for 98% of deposit-taking institutions’ reserves with the Fed (in other  

words, we exclude the credit unions); among the resident institutions, we distinguish between the US-chartered banks and the US  

branches of foreign banks (see box).  

7

A Eurodollar deposit may be created, for example, when a company withdraws a dollar-denominated deposit placed with a US-chartered  

bank (bank A) to then place it with the branch of another US-chartered bank (bank B) located outside the United States. Bank B books  

this Eurodollar on its liabilities side as a debt to customers and on its assets side as a credit with regard to its parent company in the  

United States. The latter books a debt to its branch (bank B) in its liabilities and increases its reserves with the Fed. Bank A’s debt with  

regard to the company and its reserves with the Fed are reduced. Ultimately, the creation of a Eurodollar deposit simply moves Fed  

reserves from one US-chartered bank (bank A) to another (parent company of bank B) (Windecker, 1993).  

8

Since 1981, most US deposit-taking institutions may establish an IBF (international banking facility) in US territory. With a few exceptions, an  

IBF offers the same services as a commercial bank (loans, term deposits) but exclusively to non-residents, other IBFs or other entities  

(resident or non-resident) of the banking group controlling the IBF (Chrystal, 1984). IBFs are not subject to the regulations applicable to the  

activities of domestic commercial banks (reserve requirement, possible ceilings on interest rates, deposit insurance premium).  

9

Market in which institutions holding an account with the Fed (banks, primary dealers, GSEs) trade their deposits and central bank  

reserves. Given reduced demand, the deposits of the GSEs (traditionally net sellers of federal funds) with the Fed have increased since  

2

008.  

1

0

The withdrawal of US money-market funds in the summer of 2011 temporarily dried up the European banks’ sources of refinancing in  

dollars and caused a contraction in the reserves of the US branches of European banks with the Fed.  

11  

Ten branches of foreign banks (out of around 250) were authorised to maintain their affiliation to the FDIC and to accept deposits from  

individuals after promulgation of the International Banking Act of 1978.  

12  

Whereas in 2008-2009 the financial crisis temporarily shut off access to certain markets on which the branches were dependent (they  

partially circumvented this by borrowing from the Fed), swap agreements between central banks subsequently enabled foreign banks to  

obtain dollar financing directly from their central bank, so that the branches’ net loans to their parent companies temporarily dried up.  

Then, in the summer of 2011, the withdrawal of US money-market funds temporarily dried up the European banks’ sources of dollar  

refinancing and again reduced the branches’ net loans.  

13  

Especially as the fact of having financed these purchases from specific resources does not imply an obligation to reduce specifically  

these resources upon their disposal.  

1

4

A translation of the Basel LCR standard was proposed in the US in October 2013 and the finalised rule in September 2014.  

On the grounds that the GSEs (Fannie Mae, Freddie Mac and the Federal Home Loan Banks) benefit from an “effective” government  

15  

guarantee (as opposed to the “explicit” and unconditional guarantee for Treasuries or securities issued by Federal Agencies such as  

Ginnie Mae), the debt securities for – or guaranteed by – the GSEs (excluding preferred securities) are accounted for, if they satisfy the  

OCC’s ‘investment grade’ criterion, in the range of level 2A liquid assets, after application of a 15% discount.  

16  

The fact that this volume is negligible compared with resident commercial banks’ aggregated balance sheets (around 16,000 billion  

dollars at 31 March 2015, excluding interbank loans) means that by just adding excess reserves to bank loans the trend in loans can be  

approximately aligned with the trend in deposits (chart 4). The same applies to just the US-chartered banks.  

17  

For an analysis of the new challenges for US monetary policy, see Estiot, A. (2014), A whiter shade of pale, Conjoncture February  

2014, BNP Paribas publication, and Estiot, A. (2014), The truth is out there, Conjoncture October-November 2014, BNP Paribas  

publication  

July-August 2015  

Conjoncture  

18  

18  

In order to keep control of short-term rates, the Fed paid interest (0.25%) on the banks’ excess reserves from 2008. The rate of interest  

on excess reserves (IOER) was to act as a floor for the effective rate on Federal funds, as the banks had no interest in lending each other  

central bank money at a rate below the IOER rate. Nevertheless, the GSEs, which hold accounts with the Fed but are not authorised to  

receive interest on these accounts, continued to lend liquidity at rates below the IOER, which pushed short-term rates downwards.  

Moreover, volumes traded in the Federal Funds market remained modest because of low demand from the banks (large excess reserves,  

enlargement of the basis for calculating the FDIC premium in 2011, leverage constraint).  

19  

We discussed these two methods in a previous article: The leverage ratio – the appearance of simplicity, Conjoncture June 2014, BNP  

Paribas publication.  

2

0

The Fed’s balance sheet (4,488 billion dollars) included around 2,461 billion dollars of Treasuries in mid -June.  

According to some commentators, this facility represents the first step in the evolution of the Fed’s role towards that of a “dealer of last  

21  

resort”.  

22  

The Fed defines the transaction according to its effect upon its counterparty. Therefore, from the Fed’s point of view, a reverse  

repurchase agreement is similar to a collateralised loan and booked on the liabilities side of its balance sheet.  

23  

If the volume of demand remains below the ceiling set, all participants will be served at the “offering rate” (0.05%); if it exceeds the  

ceiling, the rate applied is the “stopout rate” (rate at the level where the volume offered corresponds to the maximum authorised).  

24  

While the interest rate on these transactions remains below the IOER rate on excess reserves, the banks will have little incentive to  

participate. The facility may obviously be attractive to those looking for high-quality collateral in order to refinance themselves or to meet  

initial margin requirements; however, at prudential level, excess reserves and Treasuries (as well as repos guaranteed by Treasuries)  

benefit from an equivalent treatment (the most favourable): trading central bank money for high-quality liquid assets such as Treasuries  

would have no impact on solvency or liquidity ratios (CET1, LR, LCR or NSFR). Moreover, while the RRF interest rate is similar to an  

IOER for non-banks, the participation of GSEs is limited for technical reasons (notably settlement frequency). Thus, the programme  

involves mainly (more than 80%) money-market mutual funds (MMFs), which redirect their excess liquidity towards the central bank’s  

balance sheet (access to quality counterparty and collateral, facilitated compliance with SEC requirements).  

25  

The MMFs-prime invest mainly in non-government securities, unlike the MMFs-government. The MMFs-treasury are only authorised to  

invest in Treasuries.  

July-August 2015  

Conjoncture  

19  

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What are the federal funds?

What Are Federal Funds? Federal funds, often referred to as fed funds, are excess reserves that commercial banks and other financial institutions deposit at regional Federal Reserve banks; these funds can be lent, then, to other market participants with insufficient cash on hand to meet their lending and reserve needs.

What is Fed's balance sheet?

The Fed's balance sheet is a financial statement updated weekly that shows what the U.S. central bank owes and owns. More officially, it's the Fed's H. 4.1 statement.

What are the two types of federal funds transactions?

This chapter addresses two types of transactions: federal funds and repurchase agreements (repos), which can be either investing or financing transactions, depending on which side of the transaction the financial institution participates in.

What financial services does the Federal Reserve provide for commercial banks?

The Federal Reserve Banks provide financial services to depository institutions including banks and credit unions, much like those that banks provide for their customers. These services include collecting checks, electronically transferring funds, and distributing and receiving cash and coin.