Excess reserves

KBRA Releases the Bank Treasury Newsletter, the Bank Treasury Chart Deck, and Bank Talk: The After-Show

Retrieved on: 
Wednesday, August 19, 2020
Banking, Professional services, Finance, Money, Finance, Financial services, Banking, Interest rates, Swaps, United States housing bubble, SOFR, Libor, Monetary policy, Excess reserves, Bank

Kroll Bond Rating Agency (KBRA) releases this months edition of the Bank Treasury Newsletter, the Bank Treasury Newsletter Chart Deck, and Bank Talk: The After-Show.

Key Points: 
  • Kroll Bond Rating Agency (KBRA) releases this months edition of the Bank Treasury Newsletter, the Bank Treasury Newsletter Chart Deck, and Bank Talk: The After-Show.
  • The deluge of deposit inflows since the onset of the pandemic has slowed in the last month, which may help relieve the dilutive pressures on bank net interest margin (NIM) and profitability.
  • The relationship between LIBOR-OIS and SOFR has flipped over recent months, coinciding with changes in the level of bank excess reserves.
  • Finally, this months edition of Bank Talk: The After-Show discusses the industrys struggle to leverage efficiency gains with profitability under pressure.

Benoît Cœuré: A tale of two money markets: fragmentation or concentration

Retrieved on: 
Thursday, November 14, 2019
Economy, Money, Finance, Banking, Monetary policy, Financial markets, Economy of the European Union, Market liquidity, Excess reserves, Liquidity regulation, Central bank, Euro

SPEECHA tale of two money markets: fragmentation or concentrationSpeech by Benoît Cœuré, Member of the Executive Board of the ECB, at the ECB workshop on money markets, monetary policy implementation and central bank balance sheetsNot all of the expansion in central bank balance sheets reflects direct monetary policy actions, however.

Key Points: 


SPEECH

A tale of two money markets: fragmentation or concentration

    Speech by Benoît Cœuré, Member of the Executive Board of the ECB, at the ECB workshop on money markets, monetary policy implementation and central bank balance sheets

      • Not all of the expansion in central bank balance sheets reflects direct monetary policy actions, however.
      • Part of it relates to regulatory factors, as I will explain shortly in more detail.
      • And part of it relates to autonomous factors, such as the steady increase in the demand for banknotes.
      • These excess liquidity holdings were first a sign of uncertainty and mistrust, and then of a dysfunctional money market.
      • As a result, central bank operations substituted for market-based intermediation in times of crisis.
      • In the United States, a prime reason behind the increased complexity relates to the highly uneven distribution of excess liquidity across individual banks.
      • And in both cases, it also relates to the growing role of intermediaries without access to central bank balance sheets.

    The distribution of excess liquidity across banks

      • A number of liquidity regulations affecting banks, such as the net stable funding ratio and the liquidity coverage ratio (LCR), require banks to hold a sufficient quantity of high-quality liquid assets.
      • It is certainly not the responsibility of central banks to help commercial banks meet their regulatory requirements.
      • Banks should stand on their own feet when it comes to capital and liquidity.
      • According to data from the US Federal Deposit Insurance Corporation (FDIC), 86% of excess reserves are held by just 1% of US banks.
      • Four banks alone account for 40% of aggregate excess reserve holdings in the United States.
      • On this side of the Atlantic, the top 1% of banks hold less than 50% of excess liquidity.
      • And on the right-hand side you can see that the ten largest banks in the euro area hold just a little more than a quarter of excess liquidity, compared with almost 70% in the United States.
      • At face value, the euro areas more even distribution of liquidity suggests that it may be less likely to experience an episode of high interest rate volatility.

    The distribution of excess liquidity and the two-tier system

      • The first feature relates to the distribution of excess liquidity within and across euro area jurisdictions.
      • On the left-hand side of my next slide you can see that banks excess liquidity is often much less evenly distributed than at the country level.
      • On the right-hand side you can see that excess liquidity holdings in the euro area are also highly concentrated in just a few countries.
      • If there is fragmentation, however, then temporary spikes in interest rates are also possible in the euro area, despite the remarkable excess liquidity levels we are currently seeing.
      • The scheme allows banks to deposit a pre-determined quantity of excess liquidity their exemption allowances at a rate higher than the deposit facility rate.
      • [5] This allocation scheme has led to some banks receiving allowances that are higher than their excess liquidity holdings.
      • But because of the uneven distribution of excess liquidity, ECB staff estimates that around 4% of exemption allowances, or around 30 billion, could only be filled if banks trade across borders.
      • The observed movements in rates are broadly consistent with recent changes in cross-border flows in excess liquidity.
      • The chart shows that the Italian banking system as a whole is almost fully benefiting from the allocated allowances, also in response to the re-distribution of excess liquidity towards the Italian banking system.

    The distribution of excess liquidity across sectors

      • The second feature that warrants caution relates to the distribution of liquidity across sectors, including holdings outside the euro area.
      • Changes in the STR are essentially a function of three main factors: the level of ECB policy rates, the level of excess liquidity and the distribution of this excess liquidity across sectors.
      • All else being equal, a decline in the demand for liquidity services by non-banks for example, due to a sudden increase in risk aversion might lead to upward pressure on the STR at the same level of excess liquidity.
      • Also, a decline in excess liquidity can be expected to lead to faster upward pressure for STR, even in the absence of changes in policy rates.
      • First, we are a long way from expecting any reductions in excess liquidity in the euro area.
      • In fact, as of November, the ECBs renewed net asset purchases of 20 billion per month will further increase excess liquidity.
      • Even beyond the end our net purchases, we will continue reinvesting the principal payments from maturing securities for an extended period of time, which will keep excess liquidity abundant.

    Conclusion

    KBRA Releases the Bank Treasury Newsletter Chart Deck

    Retrieved on: 
    Tuesday, October 22, 2019
    Professional services, Finance, Economy, Financial services, Money, Banking, Monetary policy, Excess reserves, Bond, Interest rate, High-yield debt, Bank, Federal Reserve

    Kroll Bond Rating Agency (KBRA) releases this months edition of the Bank Treasury Newsletter Chart Deck, which highlights the investment strategies that bank treasurers are already using or considering as they plan for an extended period of low rates.

    Key Points: 
    • Kroll Bond Rating Agency (KBRA) releases this months edition of the Bank Treasury Newsletter Chart Deck, which highlights the investment strategies that bank treasurers are already using or considering as they plan for an extended period of low rates.
    • Many of these strategies involve adding duration to the bond portfolio, although a key objective is to have a bond portfolio with low runoff and high yields.
    • While the interest rate on excess reserves (IOER) rate, at 1.8%, is still economically compelling as an investment for bank treasurersassuming the Fed does not cut rates to 0% or even negativetotal IOER in the last quarter was just 2% of total interest income.
    • To view the chart deck, click here

    Luis de Guindos: Measures to support monetary policy transmission through banks

    Retrieved on: 
    Wednesday, September 25, 2019
    Economy, Money, Financial services, Banking, Financial economics, Monetary reform, Open market operation, Excess reserves, Monetary policy, Interest rate, Reserve requirement, European Central Bank

    SPEECHMeasures to support monetary policy transmission through banksWelcome address by Luis de Guindos, Vice-President of the ECB, to the Money Market Contact Group We believe that the measures announced last week complement each other and together constitute an effective response to the environment that the ECB currently faces.

    Key Points: 


    SPEECH

    Measures to support monetary policy transmission through banks

      Welcome address by Luis de Guindos, Vice-President of the ECB, to the Money Market Contact Group

        • We believe that the measures announced last week complement each other and together constitute an effective response to the environment that the ECB currently faces.
        • First, as a result of continued global uncertainties and their impact on confidence, our latest ECB staff macroeconomic projections were revised down.
        • We face a more protracted economic slowdown than previously anticipated and see persistent downside risks to the growth outlook.
        • Headline inflation remains well below our medium-term aim, while core inflation has been hovering around 1% for an extended period of time.
        • The case for a monetary policy response was clear and a comprehensive package of measures was judged to be the most effective response.

      Changes to the TLTRO III programme

        • You may recall that TLTRO III was announced in March to preserve the very favourable bank lending conditions in the euro area and to ensure the smooth transmission of our highly accommodative monetary policy stance.
        • At the same time, indexing the TLTRO III rates to the main refinancing operations rate and the deposit facility rate implies that, should the ECB adjust these key interest rates, the average funding conditions under the programme would be correspondingly adjusted for banks, thus helping to align this programme with the broader monetary policy stance.
        • The Governing Council made clear that the modalities of TLTRO III would take into account a thorough assessment of the bank-based transmission channel of monetary policy, as well as developments in the economic outlook.
        • The recent deterioration in the economic outlook prompted us to ease several of the terms of the new operations.
        • The extended maturity of TLTRO III will be better aligned with bank-based financing of investment projects, thereby further supporting banks financing to the real economy.

      The two-tier system

      • There are several reasons why the initial value chosen for the multiplier was six times a bank’s minimum reserve requirement.
        • First, it provides banks with some relief from negative rates. Based on current holdings of excess liquidity, the current calibration will entail annual savings for banks of about €4 billion.
        • Second, it leaves the volume of non-exempt excess liquidity which is still remunerated at the deposit facility rate at a level which is sufficiently large to ensure that money market rates remain anchored to the ECB deposit facility rate. Given that minimum reserves are currently close to €130 billion, the exempt tier would amount to some €800 billion, implying that the non-exempt amount of excess reserves still remunerated at the negative deposit facility rate would be approximately €1 trillion, down from €1.8 trillion.
        • Third, it dampens the risk of money market rates becoming subject to upward pressure due to the potential redistribution of excess liquidity among market participants to fill exemption allowances. For example, the system may induce banks that have an unused exempt tier to increase the amount they borrow from banks that hold more excess liquidity than their exempt tier. If such transactions were to occur at higher rates than before, then we may see upward pressure on certain money market rates. At this stage, we see very little evidence of this being priced in by the market, but the ECB will continue to actively monitor conditions in the money market.
        • This has helped support bank profitability across the euro area since the deposit facility rate turned negative in 2014.
        • In addition, banks have been able to generate higher non-interest income as the compression of yields is reflected in higher asset valuations.
        • Banks funding costs in wholesale markets have also decreased, mitigating the impact of lower rates on net interest income.
        • Under the two-tier system, part of each banks holdings of excess liquidity will be exempt from the negative deposit facility rate.
        • The size of the exempted part of a banks reserve accounts will initially be six times its minimum reserve requirement.

      Conclusion