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Presented By: Department of Economics

Michael Beauregard Seminar in Macroeconomics: U.S. Banks and Global Liquidity

Wenxin Du, University of Chicago Booth School of Business

econ umich econ umich
econ umich
Abstract: We document a new intermediation method, “reserve-draining intermediation”, which has been dominant in global banks’ provision of dollar liquidity post-Global Financial Crisis. Using daily supervisory data, we show that large U.S. banks use their excess reserves at the Federal Reserve to finance short-term lending in the repo and foreign exchange swap markets in response to dollar funding shortages. Intra-firm liquidity sharing between depository institutions and broker-dealer subsidiaries within the same bank holding company are crucial to reserve-draining intermediation. Our results highlight the importance of a large Federal Reserve balance sheet even when interest rates are above the zero-lower bound.

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October 20, 2021 (Wednesday) 4:00pm
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