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Working Paper
Collateral Runs
This paper models an unexplored source of liquidity risk faced by large broker-dealers: collateral runs. By setting different contracting terms on repurchase agreements with cash borrowers and lenders, dealers can source funds for their own activities. Cash borrowers internalize the risk of losing their collateral in case their dealer defaults, prompting them to withdraw it. This incentive creates strategic complementarities for counterparties to withdraw their collateral, reducing a dealer's liquidity position and compromising her solvency. Collateral runs are markedly different than ...
Working Paper
What Drives U.S. Treasury Re-use?
We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's total secured funding and their outright holdings financed through secured funding. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, ...
Discussion Paper
Repo Rate Sensitivity to Treasury Issuance and Quantitative Tightening
Over the past six months, Treasury repo rates have risen, on average, relative to the rate on the overnight reverse repurchase agreement (ON RRP) facility and have become more volatile. Recent literature has argued that these trends have been driven, in part, by the cumulative effects of quantitative tightening (QT). Specifically, during QT the Fed reduces its security holdings, which increases the amount of Treasury securities held by private investors. The reduction in securities holdings also results in a reduction in Federal Reserve (Fed) liabilities, which decreases the amount of ...
Working Paper
Retail Central Bank Digital Currencies: Implications for Banking and Financial Stability
This paper reviews the literature examining how the introduction of a retail CBDC would affect the banking sector and financial stability. A CBDC has the potential to improve welfare by reducing financial frictions, countering market power in deposit markets and enhancing the payment system. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability. The recycling of the new CBDC liability through asset purchases or lending by the central bank plays ...