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Discussion of “Evaluating Monetary Policy Operational Frameworks” by Ulrich Bindseil Jackson Hole Symposium Simon M. Potter August 26, 2016 The views presented here are those of the author and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System Figure 1 – Federal Reserve Balance Sheet August 1, 2007 ($ Billions) Assets Securities held outright Liabilities Federal Reserve notes Reverse repurchase agreements Reserve balances (incl. clearing balances) Deposits, other than reserves Other liabilities Total liabilities Capital Total liabilities and capital 791 U.S. Treasury securities 791 Federal agency debt 0 Agency MBS 0 Repurchase agreements Foreign currency denominated assets Other assets Total assets 25 21 34 871 777 32 17 5 6 837 34 871 August 3, 2016 ($ Billions) Assets Securities held outright 4,226 U.S. Treasury securities 2,463 Federal agency debt 22 Agency MBS 1,741 Repurchase agreements Foreign currency denominated assets Other assets Total assets Source: Federal Reserve Statistical Release (H.4.1) Notes: Balance sheet figures indicate Wednesday level. 0 21 220 4,467 Liabilities Federal Reserve notes Reverse repurchase agreements Reserve balances Deposits, other than reserves Other liabilities Total liabilities Capital Total liabilities and capital 1,419 311 2,403 286 8 4,427 40 4,467 1 Figure 2 – Federal Funds Target Range Federal Funds Target Range BPS 75 EFFR IOER Rate RRP Rate 50 25 0 08/15 09/15 10/15 11/15 12/15 01/16 02/16 03/16 04/16 05/16 06/16 07/16 08/16 Source: Bloomberg, Federal Reserve Bank of New York Notes: Light dashed vertical lines indicate month-ends, dark dashed lines indicate quarter-ends. Data source switches from brokered federal funds data to FR 2420 data in March 2016. 2 Figure 3 – Lower Volatility in Federal Funds Trades BPS 300 Spread Between the 75th and 25th Percentile Rate 250 200 150 100 50 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Magnified view (0-15 bps) 15 10 5 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Federal Reserve Bank of New York Notes: Figures represent federal funds rate spread between the volume-weighted 75th and 25th percentile. Data source switches from brokered federal funds data to FR 2420 data in March 2016. 3 Figure 4 – Banking Sector Balance Sheet Before Scenario 1 - Bank A lends to Bank B Bank A Assets Liabilities Reserves 200 Deposits 200 Bank B Assets Reserves Liabilities 80 Deposits Total Assets 80 280 After Bank B borrows $20m from Bank A to satisfy reserve requirement of $100m. Assets Liabilities Reserves 180 Deposits 200 Loan Receivable 20 Assets Reserves Liabilities 100 Deposits Loan Payable (+20) 80 20 300 Total Reserves remained unchanged while Total Assets increased by $20m. Before Scenario 2 - A nonbank transfers deposits from Bank A to Bank B Bank A Assets Reserves Liabilities 200 Deposits 200 Assets Reserves Bank B Liabilities 80 Deposits Total Assets 80 280 Liabilities 100 Deposits 100 (+0) After A nonbank pulls $20m in deposits from Bank A and places them in account at Bank B. Assets Reserves Liabilities 180 Deposits 180 Total Reserves and Total Assets remained unchanged. Assets Reserves 280 4 Figure 5 – Discount Window Stigma Percent of Federal Funds Daily Volume Traded Above Discount Rate Percent 90 80 70 60 50 40 30 20 10 0 2007 2008 2009 2010 2011 2012 2013 Source: Federal Reserve Bank of New York Notes: Data source switches from brokered federal funds data to FR 2420 data in March 2016. 2014 2015 2016 5 Figure 6 – Liquidity Provision and Regulation “…managing liquidity risk is a core activity of banking, and it seems unlikely that centralizing this subtle activity through liquidity regulation can be done without efficiency costs. Therefore liquidity regulation must not be overburdened, and central banks providing some well-designed and rule based economic counterincentives to an excessive reliance on the [lender of last resort] is an important contribution to reduce the burden put on regulation.” - Ulrich Bindseil (2016) 6 Figure 7 – Projected SOMA Domestic Securities Holdings December 2014 December 2015 August 2016 (Reinvestment Policy Median) August 2016 (Reinvestment Policy Mean) $ Billion 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 Historical Values 0 2010 2011 2012 2013 2014 Projections (rounded) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Source: Federal Reserve Bank of New York staff projections Notes: As presented in the FRBNY’s Report on Domestic Open Market Operations for 2014 and 2015. August 2016 projections are based on interest rate path assumptions drawn from market forward rates and expectations for changes in reinvestment policy drawn from the FRBNY’s July 2016 Survey of Primary Dealers. For the mean reinvestment expectation, survey responses suggesting no end to reinvestments were assigned the date at which staff project the size of the portfolio to normalize assuming normal currency growth and no end in reinvestments. 7