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
GROUP ECONOMIC RESEARCH
ADVANCED ECONOMIES AND STATISTICS
BANKING ECONOMICS
EMERGING ECONOMIES AND COUNTRY RISK
OUR PUBLICATIONS
CONJONCTURE
Structural or in the news flow, two issues analysed in depth
EMERGING
Analyses and forecasts for a selection of emerging economies
PERSPECTIVES
Analyses and forecasts for the main countries, emerging or
developed
ECOFLASH
Data releases, major economic events. Our detailed views…
ECOWEEK
Weekly economic news and much more…
ECOTV
In this monthly webTV, our economists make sense of economic
news
ECOTV WEEK
What is the main event this week? The answer is in your two
minutes of economy
You can read and watch our analyses
on Eco news, our iPad and Android application
©
BNP Paribas [2015]. All rights reserved.
Prepared by Economic Research – BNP PARIBAS
Registered Office: 16 boulevard des Italiens – 75009 PARIS
Tél : +33 [0] 1.42.98.12.34 – Internet : www.bnpparibas.com
Publisher: Jean Lemierre – July August 2015
//economic-research.bnpparibas.com
ISSN 0224-3288 – Copyright BNP Paribas - Printed in France by: Ateliers J. Hiver SA