How the Financial System Works · How the Financial System Works 1 - A Map of Money Flows in the...

How the Financial System Works

1

- A Map of Money Flows in the Global Financial Ecosystem -

by Zoltan Pozsar

An Appendix to the paper “Shadow Banking: The Money View” (Pozsar, 2014)

Senior Adviser

Office of Financial Research, U.S. Treasury

2. The Hierarchy of Access.

2

3. The Hierarchy of Uses..

4. The Dealer Eco-System.

1. The Hierarchy of Money.

5. The Macro Perspective.

6. Policy Implications...

Four core institutions:

Central bank,…

Source: Pozsar (2014)3

Central Bank

(Federal Reserve)



Central bank, banks (small and

big),…

Central Bank

(Federal Reserve)

Banks

(retail)

Banks

(wholesale)




big), dealers,…

Central Bank

(Federal Reserve)Dealer Banks

Banks

(retail)Dealer Banks

Banks

(wholesale)




big), dealers and money funds.

Central Bank


Money Funds

Banks


Money FundsBanks

(wholesale)

Four core money claims:

Currency,…


Central Bank


Currency

Money Funds

Banks


Money Funds

Liabilities

Banks

(wholesale)



Currency, deposits,…

Liabilities

Banks

(wholesale)

Deposits

(o/n)

Banks


Deposits

Money Funds

(o/n)

Central Bank


Currency

Money Funds



Currency, deposits, repos,…

(o/n)

Liabilities

Banks

(wholesale)

Deposits

(o/n)

Banks


Deposits

Money Funds

Repos

(o/n)

Central Bank


Currency Repos

(o/n)

Money Funds



Currency, deposits, repos

and constant NAV shares.

(o/n)

Liabilities

CNAVs

(o/n)

Banks

(wholesale)

Deposits

(o/n)

CNAVs

Banks


Deposits

Money Funds

(o/n)

Repos

(o/n)

Central Bank


Currency Repos

(o/n)

Money Funds


Two categories of assets:

Public assets:

T-Bills – Treasury bills

T-Notes – Treasury notes

Private assets:

P-Bills - CD, CP, ECP, etc.

P-Notes - bonds, RMBS, ABS

Liabilities

Deposits CNAVs

(o/n) (o/n)

Repos

(o/n) (o/n)

Banks

(wholesale)Money Funds

(o/n)

Private Assets

Banks


Deposits

(o/n)

Money Funds

CNAVs

Assets

Public Assets

Central Bank


Currency Repos



Public assets:



Private assets:



Liabilities

CNAVs

(o/n)

Deposits

(o/n)

(o/n)

Private Assets

Banks


Deposits

Money Funds

(o/n)

CNAVs

Dealer Banks

T-Notes Currency Repos

(o/n)

Assets

Public Assets

Central Bank

(Federal Reserve)

Banks

(wholesale)

Money Funds

(o/n)

Repos



Public assets:



T-Repos – Treasury repos

Private assets:



Liabilities

Deposits CNAVs

(o/n) (o/n)

Repos

(o/n) (o/n)

Banks


(o/n)

Private Assets

Banks


Deposits

…

(o/n)

T-Notes

Money Funds

CNAVs

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

T-Notes Currency T-Bills T-Repos



Public assets:




T-CNAVs – Treasury CNAVs

Private assets:



Liabilities

Deposits CNAVs

(o/n) (o/n)

Repos

(o/n) (o/n)

Banks


(o/n)

Private Assets

Banks


Deposits

…

(o/n)

T-Notes

Money Funds

(government-only)

T-Bills T-CNAVs

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)




Public assets:





Private assets:



…

T-Notes

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)


(o/n)

Money Funds

(government-only)

T-Bills T-CNAVs

Private Assets

Banks


P-Loans Deposits

Money Funds

(o/n) (o/n)

Banks

(wholesale)

Deposits

(o/n)

(o/n)

Repos

Liabilities

CNAVs

(o/n)



Public assets:





Private assets:



P-Notes Deposits CNAVs

Liabilities

…

(o/n) (o/n)

P-Loans

(o/n) (o/n)

Banks


T-Notes

Money Funds

(government-only)

Private Assets

Banks


P-Loans Deposits

(o/n)

Repos

T-Bills T-CNAVs

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)


…

(o/n)



Public assets:





Private assets:



P-Repos – private repos

P-Notes Deposits CNAVs

Liabilities

…

(o/n) (o/n)

P-Loans

(o/n)

…

(o/n)

Banks


T-Notes

Money Funds

(government-only)

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

P-Loans Deposits P-Bills

P-Notes

(o/n)

P-Repos

T-Bills T-CNAVs

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)


…

(o/n)



Public assets:





Private assets:



P-Repos – private repos

P-CNAVs – private CNAVs

P-Notes Deposits P-Bills P-CNAVs

Liabilities

…

(o/n) (o/n)

P-Loans

(o/n)

…

(o/n)

Banks

(wholesale)

Money Funds

(prime)

T-Notes

Money Funds

(government-only)

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)


P-Notes

(o/n)

P-Repos

T-Bills T-CNAVs

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)


…

(o/n)


Deposits’ special function:

Banks form the backbone of

the payments system and fa-

cilitate the net payments

(via deposits) of all enti-

ties that are lower in the

system-hierarchy, including

dealers and money funds. T-Bills T-CNAVs

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)


…

(o/n)

T-Notes

Money Funds

(government-only)

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)


P-Notes

(o/n)

P-Repos

(o/n)

…

(o/n)

Banks

(wholesale)

Money Funds

(prime)


Liabilities

…

(o/n) (o/n)

P-Loans


Storing payment surpluses:

What happens with net pay-

ment surpluses at the end of

the day? Through what ins-

truments are money balances

stored within the system?

For every institution, money

is something different.

This is the intra-system

hierarchy of money…


Liabilities

…

(o/n) (o/n)

P-Loans

(o/n)

…

(o/n)

Banks

(wholesale)

Money Funds

(prime)

T-Notes

Money Funds

(government-only)

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)


P-Notes

(o/n)

P-Repos

T-Bills T-CNAVs

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)


…

(o/n)


Intra-system money hierarchy:

Reserves at the Fed

are money for banks.(o/n)

…P-Loans

Assets

Public Assets

Central Bank

(Federal Reserve)

Reserves

P-Loans

Dealer Banks

(government desk)


(o/n)

…

T-Notes

Money Funds

(prime)

Reserves

(o/n)

T-Bills T-CNAVs

Money Funds

(government-only)

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

Reserves Deposits P-Bills P-Repos

(o/n) (o/n) (o/n)

…

P-Notes…

Liabilities

(o/n) (o/n) (o/n)

Banks

(wholesale)

Deposits P-Bills P-CNAVs



o/n T-Repos with wholesale

banks are money for dealers.(o/n)

Assets

Public Assets

Central Bank

(Federal Reserve)

Reserves

Banks

(wholesale)

…

P-Loans

Dealer Banks

(government desk)

T-Notes Currency T-Repos T-Repos

(o/n) (o/n)

…

T-Notes

(o/n)

Money Funds

(government-only)

T-Bills T-CNAVs

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)


(o/n) (o/n) (o/n)

…P-Loans

…

P-Notes

Money Funds

(prime)

Liabilities

Reserves T-Repos P-Bills P-CNAVs

(o/n) (o/n) (o/n)

…

Deposits

(o/n)



o/n T-Repos w/ dealers are

money for government MFs.

P-Loans

…P-Loans

(o/n)

Assets

Public Assets

Central Bank

(Federal Reserve)

Reserves

Private Assets

Banks

(retail)

(o/n) (o/n)

…

Dealer Banks

(government desk)


(o/n) (o/n)

…

T-Notes

Money Funds

(government-only)


T-Repos T-CNAVs

(o/n) (o/n)

(o/n)

……

Dealer Banks

(credit desk)

(o/n)

P-Notes

Banks

(wholesale)

Money Funds

(prime)

Liabilities

T-Bills

…

Deposits

(o/n)

Reserves T-Repos P-Bills P-CNAVs

(o/n) (o/n)



o/n P-Repos with dealers

are money for prime MFs.

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)


Reserves (o/n) (o/n)

(o/n) …

T-Notes

(o/n) (o/n)

Money Funds

(government-only)

T-Repos T-CNAVs

…

T-Bills

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

Reserves Deposits P-Repos P-Repos

(o/n) (o/n) (o/n)

…P-Loans P-Notes

…

Banks

(wholesale)

Money Funds

(prime)

Reserves T-Repos P-Repos P-CNAVs

Liabilities…

(o/n)


(o/n)

(o/n) (o/n) (o/n) (o/n)

… …


Liabilities

?


(o/n)

(o/n) (o/n) (o/n) (o/n)

… … …

Banks

(wholesale)

Money Funds

(prime)


P-Loans P-Notes

P-Repos

(o/n) (o/n) (o/n) (o/n)

… …

T-Bills

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

Reserves Deposits P-Repos

(o/n) (o/n)

…

Money Funds

(government-only)

T-Repos T-CNAVs

(o/n) (o/n)

(o/n) …

T-Notes

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)


Reserves


The sovereign as a “bank”:

Without the sovereign the

money matrix is incomplete.

We do not typically think

of her as a bank, but the

sovereign is also capable

of absorbing money demand.

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)



(o/n) …

T-Notes

(o/n) (o/n) (o/n) (o/n)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Reserves T-Bills T-Repos T-CNAVs

…

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)


… …

(o/n) (o/n) (o/n) (o/n)

P-Loans

T-Bills

P-Repos

P-Notes

Banks

(wholesale)

Money Funds

(prime)


(o/n) (o/n) (o/n) (o/n)

… … …Liabilities


(o/n)


What are money-like claims?

Par at maturity versus

par on demand claims.

Par at maturity in the

near term (o/n < 1 yr).

Breakable and negotiable

claims that do not trade

at par in real time (puts

prior to maturity subject

to penalty, market risks).

Liabilities


(term) (term)

(o/n) (o/n) (o/n) (o/n)

… … …

Banks

(wholesale)

Money Funds

(prime)


P-Repos

P-Notes P-Repos

(term) (term)

P-Loans Deposits

T-Bills T-Bills

(term) (term)

… …

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)


… … … …

(o/n) (o/n) (o/n) (o/n)

T-Notes T-Repos

(o/n) (o/n) (o/n) (o/n)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)


Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)



(o/n) … …

(term)

The alchemy of banking:

Take more [o/n liquidity],

give less [o/n liquidity]

and put the rest in term…


(term)


T-Notes T-Repos

(term)

…

<

Sovereign

(U.S. Treasury)

(o/n) (o/n)

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

…

T-Bills

(term)


Reserves T-Bills

(o/n)

…P-Loans

T-Repos T-CNAVs

… …

<

Money Funds

(government-only)

(o/n) (o/n)

T-Bills

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

… … …

< <(o/n) (o/n) (o/n) (o/n)

(o/n) (o/n) (o/n)


Deposits P-Notes P-Repos

(term) (term)


Banks

(wholesale)

Money Funds

(prime)

(o/n)

… … …

<<

Liabilities


(term) (term)

Liabilities

(term) (term)

… … …


(o/n)

(term) (term)

Banks

(wholesale)

Money Funds

(prime)

(o/n) < (o/n) (o/n) <

Reserves T-Repos P-Repos P-CNAVs… … …


Private Assets

Banks

(retail)

Dealer Banks

(credit desk)


(o/n) < (o/n) (o/n) < (o/n)

… …

T-Bills T-Bills

(term) (term)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

(o/n) (o/n) (o/n) < (o/n)


T-Notes T-Repos

(term)

(o/n) < (o/n)

… …(o/n)

…P-Loans

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)


Reserves


The alchemy of banking:

Take more [o/n liquidity],

give less [o/n liquidity]

and put the rest in term…

…this exposes “banks” to

rollover risks, and if

there is a run you ask:

“do I have enough [o/n]

liquidity to survive?”.

Different institutions

have different sets of

backups for survival if

o/n liquidity runs out.

It is the type and mix of

these backups (or “puts”)

that determine the strength

of money claims’ promise of

at par on demand liquidity.

Hierarchy of liquidity puts:

Money funds can borrow

only limited amounts.

If this option is exhausted

money funds must sell.

In a panic, this will likely

spiral into a fire sale.


(term)

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)


…

T-Bills

(term)

Reserves (o/n) < (o/n)

… …(o/n)

T-Notes T-Repos

(term)

Money Funds

(funding/market)

Sovereign

(U.S. Treasury)


(o/n) (o/n) (o/n) < (o/n)


…

T-Bills

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

(o/n) < (o/n) (o/n) < (o/n)

(o/n)

(term) (term)

(o/n) <

… … …


<

… … …


Money Funds

(funding/market)

Banks

(wholesale)

P-Loans…

Liabilities

(term) (term)


(o/n) (o/n)


Dealers have more room to

borrow against their assets.

If this option is exhausted

dealers must sell too.

In a panic, this will likely

spiral into a fire sale too.


Assets

Public Assets

Central Bank

(Federal Reserve)


…

T-Bills

(term)

Reserves

(term)

(o/n) < (o/n)

… …

T-Notes T-Repos

(term)

Sovereign

(U.S. Treasury)

Money Funds

(funding/market)


(o/n) (o/n) (o/n) < (o/n)

…

T-Bills

Private Assets

Banks

(retail)

(o/n) < (o/n) (o/n) < (o/n)

< (o/n)

(term) (term)

P-Bills


… … …



Banks

(wholesale)

Money Funds

(funding/market)

Deposits

(o/n) < (o/n) (o/n)

(o/n)

P-Loans…

Dealer Banks

(funding/market)

Liabilities

Dealer Banks

(funding/market)

(term) (term)

… … …

P-Loans


Borrowing against assets and

selling assets is access to

funding and market liquidity.

Funding and market liquidity

are private liquidity puts.

They both depend on private

market participants (banks

and dealers) for execution.


Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(funding/market)



… …

T-Notes T-Repos

(term)


Sovereign

(U.S. Treasury)

Money Funds

(funding/market)

(o/n) (o/n) (o/n) < (o/n)

… …

T-Bills T-Bills

(term) (term)

Private Assets

Banks

(retail)

Dealer Banks

(funding/market)


(o/n) < (o/n) (o/n) < (o/n)

… … …



(o/n) < (o/n) (o/n) <

Liabilities

(term) (term)

(o/n)

P-Loans…

Private Liquidity Puts

… … …


(o/n)

(term) (term)

Banks

(wholesale)

Money Funds

(funding/market)


Retail and wholesale banks

can borrow against assets or

put them to the central bank.

Retail and wholesale banks

hardly ever have to sell.

This is access to funding

as well as lender of last

resort (LoLR) liquidity.


(term)

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(funding/market)


…

T-Bills

(term)


… …(o/n)

T-Notes T-Repos

(term)

Sovereign

(U.S. Treasury)

Money Funds

(funding/market)


(o/n) (o/n) (o/n) < (o/n)

…

T-Bills

Private Assets

Dealer Banks

(funding/market)

(o/n) < (o/n) (o/n) < (o/n)

< (o/n)

(term) (term)

P-Bills


… … …



Money Funds

(funding/market)

(o/n) < (o/n) (o/n)


P-Loans…

Liabilities

Banks

(funding/LoLR)

Banks

(funding/LoLR)

(term) (term)

… … …

P-Loans Deposits


The sovereign has a monetary

backstop (usually a taboo;

often used during WWI & II

and recently the OMT, see

McCulley and Pozsar, 2012).


Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(funding/market)


(term)


(o/n) … …

T-Notes T-Repos

Sovereign

(monetary backtop)

Money Funds

(funding/market)


(o/n) (o/n) (o/n) < (o/n)

… …

T-Bills T-Bills

(term) (term)

Private Assets

Banks

(funding/LoLR)

Dealer Banks

(funding/market)


(o/n) < (o/n) (o/n) < (o/n)

… … … …

P-Loans Deposits P-Notes P-Repos


(o/n)

(term) (term)

Banks

(funding/LoLR)

Money Funds

(funding/market)

(o/n) < (o/n) (o/n) <

… … …



Liabilities

(term) (term)


LoLR and monetary backstops

are public liquidity puts.


Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(funding/market)


(term)


(o/n) … …

T-Notes T-Repos

Sovereign

(monetary backtop)

Money Funds

(funding/market)


(o/n) (o/n) (o/n) < (o/n)

… …

T-Bills T-Bills

(term) (term)

Private Assets

Banks

(funding/LoLR)

Dealer Banks

(funding/market)


(o/n) < (o/n) (o/n) < (o/n)

… … … …



(o/n)

(term) (term)

Banks

(funding/LoLR)

Money Funds

(funding/market)

(o/n) < (o/n) (o/n) <

… … …


Public Liquidity Puts Private Liquidity Puts

Liabilities

(term) (term)


LoLR and monetary backstops

are public liquidity puts.

But official liquidity puts

are of value only if one has

the capital to put up the

haircut at the central bank

to borrow the needed funds.

If capital is short the

hierarchy of credit puts

overrides the hierarchy

of liquidity puts.

Source: Pozsar (2014)36Public Liquidity Puts Private Liquidity Puts

Liabilities

(term) (term)

… … …


(o/n)

(term) (term)

Banks

(funding/LoLR)

Money Funds

(funding/market)

(o/n) < (o/n) (o/n) <


… … … …


Private Assets

Banks

(funding/LoLR)

Dealer Banks

(funding/market)


(o/n) < (o/n) (o/n) < (o/n)

… …

T-Bills T-Bills

(term) (term)

Sovereign

(monetary backtop)

Money Funds

(funding/market)


(o/n) (o/n) (o/n) < (o/n)

(o/n)

(o/n) … …

T-Notes T-Repos

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(funding/market)


(term)

Reserves (o/n) <

Hierarchy of credit puts:

T-Bills are guaranteed.


Assets

Public Assets

Central Bank



(term)


… …

T-Notes T-Repos

(term)


Sovereign

(guaranteed)Money Funds

(o/n) (o/n) (o/n) < (o/n)

Private Assets

Banks Dealer Banks

(o/n) <

… … …

(o/n) (o/n) < (o/n)

(o/n)(o/n) < (o/n)

… …

T-Bills T-Bills

(term)



(term) (term)

<

… … …


Banks Money Funds

(o/n)

P-Loans…

Liabilities

(term) (term)


(o/n)


Deposits are government

insured up to $250,000.


Assets

Public Assets

Central Bank



(term)


… …

T-Notes T-Repos

(term)


Sovereign


(o/n) (o/n) (o/n) < (o/n)

Private Assets

Banks

(insured)Dealer Banks

(o/n) <

… … …

(o/n) (o/n) < (o/n)

(o/n)(o/n) < (o/n)

… …

T-Bills T-Bills

(term)



(term) (term)

<

… … …


Banks Money Funds

(o/n)

P-Loans…

Liabilities

(term) (term)


(o/n)


Guarantees and insurance

are public credit puts.


Assets

Public Assets

Central Bank




… …

T-Notes T-Repos

(term)


Sovereign


(o/n) (o/n) (o/n) < (o/n)

… …

T-Bills T-Bills

(term) (term)

Private Assets

Banks

(insured)Dealer Banks


(o/n) < (o/n) (o/n) < (o/n)

… … …



(o/n) < (o/n) (o/n) <

Liabilities

(term) (term)

(o/n)

P-Loans…

Public Credit Puts

… … …


(o/n)

(term) (term)

Banks Money Funds


Repos are secured claims.


Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(secured)


(term)


… …

T-Notes T-Repos

(term)


Sovereign


(o/n) (o/n) (o/n) < (o/n)

Private Assets

Banks

(insured)

Dealer Banks

(secured)

(o/n) <

… … …

(o/n) (o/n) < (o/n)

(o/n)(o/n) < (o/n)

… …

T-Bills T-Bills

(term)



(term) (term)

<

… … …


Banks Money Funds

(o/n)

P-Loans…

Liabilities

(term) (term)


Public Credit Puts

(o/n)


Money fund shares are backed

either by secured and guaran-

teed assets, or secured and

diversified assets. They may

also have reputational puts

to their sponsor (weak puts).


Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(secured)


(term)


… …

T-Notes T-Repos

(term)


Sovereign

(guaranteed)

Money Funds

(secured/guaranteed)

(o/n) (o/n) (o/n) < (o/n)

Private Assets

Banks

(insured)

Dealer Banks

(secured)

(o/n) <

… … …

(o/n) (o/n) < (o/n)

(o/n)(o/n) < (o/n)



(term) (term)


BanksMoney Funds

(secured/diversified)

Liabilities

(term) (term)

<

Public Credit Puts

… … …

P-Loans Deposits

(o/n)

P-Loans…

P-Bills

(o/n)

… …

T-Bills T-Bills

(term)



Collateral, diversification

and reputational puts are

all private credit puts.

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(secured)



… …

T-Notes T-Repos

(term)


Sovereign

(guaranteed)

Money Funds


(o/n) (o/n) (o/n) < (o/n)

… …

T-Bills T-Bills

(term) (term)

Private Assets

Banks

(insured)

Dealer Banks

(secured)


(o/n) < (o/n) (o/n) < (o/n)

… … …



(o/n) < (o/n) (o/n) <

Liabilities

(term) (term)

(o/n)

P-Loans…

Public Credit Puts Private Credit Puts

… … …


(o/n)

(term) (term)

BanksMoney Funds



Un-insured deposits are un-

secured and un-diversified.


Liabilities

Banks

(un-insured)

(term)

(term)

… … …

P-Loans

< (o/n) (o/n)

Public Credit Puts Private Credit Puts


Money Funds


Deposits

(term)


(term) (term)


… …

T-Bills T-Bills

(term)

Private Assets

Banks

(insured)

Dealer Banks

(secured)

(o/n) <

… … …

(o/n) (o/n) < (o/n)

< (o/n)

P-Bills

(o/n)

Sovereign

(guaranteed)

Money Funds


(o/n) (o/n) (o/n) < (o/n)


T-Notes T-Repos

(term)

(o/n) < (o/n)

… …(o/n)

P-Loans…

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(secured)


Reserves

The hierarchy of money:

The types of assets and the

types of backstops behind

money claims yield four

basic categories of money.

Purely public, hybrid and

purely private money claims.


Pur ely

Money Funds

(government-only)

Money Funds

(prime)

Sovereign

(U.S. Treasury) (i.e. the FDIC) on all deposits < $250K.

Banks

(retail)Private Assets

Purely public money:

Ability to tax and money creation at will

T-Bills

[1]

[2]

[3]

[4]

(o/n) < (o/n)

Deposits P-Bills

Private-public money:

Explicit liquidity puts from the Fed, and

explicit credit puts from the sovereign

…

T-Bills

T-CNAVs

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)


Purely

public


… …

T-Notes T-Repos

Reserves T-Repos

(o/n)

P-Loans…

Liabilities

Private … …

public P-Notes P-Repos

Banks

(wholesale)


(o/n) < (o/n) (o/n)

Public Backstops Private Backstops

(term) (term)

(term)


(o/n) < (o/n) < (o/n)

Dealer Banks

(credit desk)

… …

private

…

P-Loans

(term)

(term) No official puts, not even implicitly via

the collateral involved. Peripheral money

Purely private money:

but no direct puts on the liability side.

puts via Treasury collateral involved,

Implicit official liquidity and credit

Public-private money:Public

private

< (o/n)









sha dow

Liabilities

Private


(term) (term)

… … …


(o/n) < (o/n) (o/n) < (o/n)


Banks

(wholesale)

Money Funds

(prime)


P-Loans money P-Notes P-Repos


… Insured … … [4] Private shadow money:

Deposits P-Repos P-Repos

(o/n) < (o/n) < (o/n)

money (term) shadow


Private Assets


Banks

(retail)

Dealer Banks

(credit desk)


Reserves

…

Public T-Bills Public [3] Public shadow money:

ReservesT-Bills

T-Repos T-CNAVs

(o/n) (o/n) < (o/n)

(term)


Sovereign

(U.S. Treasury)

Money Funds

(government-only)


(i.e. the FDIC) on all deposits < $250K.

… …

T-Notes T-Repos [2] Insured money:

T-Repos


Assets

Public Assets

[1] Public money:

Central Bank

(Federal Reserve)

Dealer Banks

(government desk) Ability to tax and money creation at will

T-Notes Currency T-Repos








Traditional money supply…


sha dow

[1] Public money (M0, or base money):

Central Bank

(Federal Reserve)

Dealer Banks


T-Notes CurrencyM0

T-Repos T-Repos





… …

T-Notes T-Repos [2] Insured money (M1 and M2):

Money Funds

(government-only)

Assets

Public Assets

(term)

ReservesT-Bills

T-Repos T-CNAVs

(o/n) (o/n) < (o/n)

Deposits P-Repos P-Repos

(o/n) < (o/n)

Private Assets

Reserves T-Repos

Deposits

Public shadow money:

money (term) shadow


[3]

P-Loans… [4] Private shadow money:

money P-Notes P-Repos

P-CNAVs


Banks

(retail)

Dealer Banks

(credit desk)


Reserves

…

< (o/n)

(o/n)


Banks

(wholesale)


Sovereign

(U.S. Treasury)

Liabilities

< (o/n) (o/n) < (o/n)

… …

…

P-Bills

Insured M1

M2

… …

Public T-Bills Public

Money Funds

(prime)

P-Repos


(term) (term)

P-Loans Private








Traditional money supply

vs. shadow money supply.


sha dow

P-Loans…

Liabilities

M1

M2

M3

M3

M3

… … …


(o/n) < (o/n) (o/n) < (o/n)


(term) (term)

P-Loans Deposits P-Bills Private

money P-Notes P-Repos

No official puts, not even implicitly via


(term)

Money Funds

(prime)

Assets

Public Assets

(term)




… …


ReservesT-Bills

T-Repos

(o/n)

Banks

(wholesale)

Insured … … [4] Private shadow money (M3):

< (o/n) < (o/n)

money shadow

Private Assets


Central Bank

(Federal Reserve)

Dealer Banks


T-Notes Currency T-Repos

(term)

T-Repos

Reserves (o/n) < (o/n)M0

…

Public T-Bills Public [3] Public shadow money (M3):

P-Repos

T-CNAVs

(o/n) (o/n) < (o/n)



Banks

(retail)

Dealer Banks

(credit desk)



Money Funds

(government-only)

Sovereign

(U.S. Treasury)










The shadow banking system…


sha dow

Money Funds

(government-only)

Money Funds

(prime)

Sovereign

(U.S. Treasury)


Central Bank

(Federal Reserve)

Dealer Banks


T-Notes CurrencyM0

T-Repos T-Repos


(term) shadow


…

Public

Assets

Public Assets

(term)




… …


ReservesT-Bills

T-Repos T-CNAVs

(o/n) (o/n) < (o/n)

[3] Public shadow money (M3):

money

T-Bills PublicM3

Private Assets


Banks

(retail)

Dealer Banks

(credit desk)



(o/n) < (o/n) < (o/n)

… Insured M1

M2

… …



Banks

(wholesale)

[4] Private shadow money (M3):


(o/n)

… … …


Reserves T-ReposM3

P-Repos P-CNAVs

(o/n) < (o/n) (o/n) <

Liabilities


M3(term) (term)

Private











[1] Public-private subsystem

(public collateral, maturity

and liquidity transformation

see Carney and Panetta, 2011)


sha dow

Liabilities


M3(term) (term)

Private

(o/n)

… … …


Reserves T-ReposM3

P-Repos P-CNAVs

(o/n) < (o/n) (o/n) <



Banks

(wholesale)



T-Bills PublicM3

Private Assets


Banks

(retail)

Dealer Banks

(credit desk)



(o/n) < (o/n) < (o/n)

… Insured M1

M2

… …

(term)

Assets

Public Assets

(term)




… …


ReservesT-Bills

T-Repos T-CNAVs

(o/n) (o/n) < (o/n)


money

Money Funds

(government-only)

Money Funds

(prime)

Sovereign

(U.S. Treasury)


Central Bank

(Federal Reserve)

Dealer Banks


T-Notes CurrencyM0

T-Repos T-Repos


(term) shadow


…

Public











[1] Public-private subsystem

(public collateral, maturity

and liquidity transformation

see Carney and Panetta, 2011)

[2] Purely private subsystem

(private collateral, credit,

maturity and liquidity trafo,

see Pozsar et al, 2010)


sha dow

Liabilities


M3(term) (term)

Private

(o/n)

… … …


Reserves T-ReposM3

P-Repos P-CNAVs

(o/n) < (o/n) (o/n) <



Banks

(wholesale)



T-Bills PublicM3

Private Assets


Banks

(retail)

Dealer Banks

(credit desk)



(o/n) < (o/n) < (o/n)

… Insured M1

M2

… …

(term)

Assets

Public Assets

(term)




… …


ReservesT-Bills

T-Repos T-CNAVs

(o/n) (o/n) < (o/n)


money

Money Funds

(government-only)

Money Funds

(prime)

Sovereign

(U.S. Treasury)


Central Bank

(Federal Reserve)

Dealer Banks


T-Notes CurrencyM0

T-Repos T-Repos


(term) shadow


…

Public

Enter the Fed’s RRPs:

Recall that only banks and

the sovereign can have re-

serve accounts at the Fed.

For dealers, money is o/n

T-Repos with large banks.

For money funds, money is

o/n T-Repos with dealers.

No longer…


sha dow

Liabilities


M3(term) (term)

Private

(o/n)

… … …


Reserves T-ReposM3

P-Repos P-CNAVs

(o/n) < (o/n) (o/n) <

Banks

(wholesale)


T-Bills PublicM3

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)


(o/n) < (o/n) < (o/n)

… Insured M1

M2

… …

(term)

Assets

Public Assets

(term)

… …

T-Notes T-Repos

ReservesT-Bills

T-Repos T-CNAVs

(o/n) (o/n) < (o/n)

money

Money Funds

(government-only)

Money Funds

(prime)

Sovereign

(U.S. Treasury)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

T-Notes CurrencyM0

T-Repos T-Repos


(term) shadow

…

Public

Enter the Fed’s RRPs:

RRPs effectively give money

funds and dealers, the core

entities of the shadow ban-

king system, access to a re-

serve account at the Fed for

the very first time in U.S.

monetary history. Do appre-

ciate the evolutionary sig-

nificance of this step and

look beyond the view that

the only significance of

RRPs is that they will help

the Fed control short rates.

RRPs are likely a station,

not a destination (more on

this shortly in Part II).


sha dow

M0

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

T-Notes RRP RRPs T-Repos

(o/n) (o/n) < (o/n)

Assets

Public Assets

Reserves (term)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

… …

Currency T-Notes T-Repos

ReservesT-Bills

RRPs T-CNAVs

(o/n) (o/n) < (o/n)

money (term) shadow

…

Public T-Bills PublicM3

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

Reserves Deposits RRPs P-Repos

(o/n) < (o/n) < (o/n)

… Insured M1

M2

… …

(term)

Banks

(wholesale)

Money Funds

(prime)


M3(term) (term)

(o/n)

… … …


T-Repos

(o/n)

Reserves

(o/n)M3

RRPs P-CNAVs

< (o/n) <

Private

Liabilities


0

500

1,000

1,500

2,000

2,500

3,000

3,500

Public Money Insured Money Private Shadow Money Public Shadow Money

Q3-13

Reserves Reverse Repos T-Bills Demand Deposits Dealer Repos [o/n] Securities Loaned CNAVs

Overnight money claims by type:

$ billions

Source: Federal Reserve Z.1 and H.8, New York Fed (FR 2004), FDIC, U.S. Treasury 53

0

1,000

2,000

3,000

4,000

5,000

6,000

Insured Money Public Money Private Shadow Money Public Shadow Money

Q3-13

T-Bills T-Notes w/ RM < 1 yr. Small TDs and savings deposits Large TDs Dealer Repos [term] Securities Loaned

Term money claims by type:

$ billions

Source: Federal Reserve Z.1 and H.8, New York Fed (FR 2004) and author’s calculations 54


55






Retail cash investors:

Mom and pop depositors.

Holdings of cash and

insured bank deposits.


Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Money Funds

(prime)

(term)


…


(o/n)

… …

(term)

Banks

(wholesale)

Deposits P-Notes

Liabilities

(term) (term)

P-Repos

(o/n) < (o/n) (o/n) <


(term)

Private Assets

Banks

(insured)

Dealer Banks

(credit desk)


(o/n) < (o/n) (o/n) < (o/n)

… … …

…

T-Bills T-Bills

(term) (term)

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)



Reserves T-Bills T-Repos

(o/n)

P-Loans…

… …

T-CNAVs

T-Notes T-Repos

(o/n) (o/n) (o/n) < (o/n)

…

Institutional cash pools:

At least $10bn in cash AuM

(see Pozsar, 2011 and 2012).

Cash portfolio managers (PM).

Mandate: “Do not lose”.

Restricted to invest mostly

in money market instruments.


(term)

<

Dealer Banks

(credit desk)

Reserves Deposits

(o/n) (o/n)


(o/n) (o/n) (o/n) (o/n)

(term)

(term)

(o/n)

Sovereign

(U.S. Treasury)

Money Funds

(prime)

Money Funds

(government-only)

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)



…

<

…


T-Repos

Private Assets

Banks

(retail)

…

Deposits P-Bills


(o/n) (o/n) (o/n) (o/n)

…

T-Bills

(term)

< <

…

< <

Liabilities

T-Notes

T-Bills

P-Notes

(term)

(term) (term)

… …

P-Loans

… … …

Deposits P-Repos

Banks

(wholesale)

P-Repos P-Repos

(o/n)

(o/n)

P-Loans…








[1] FX reserve managers’

liquidity tranches.


…

"Cash"

(term)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

T-Notes Currency T-Repos T-Repos "Cash"

…Reserves (o/n) < (o/n) (o/n)

(o/n) … …

(o/n)

T-Notes T-Repos Equity

(term) (permanent)

(o/n)(o/n)

… …

T-Bills T-Bills


<(o/n)

(term) (term)

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)


(o/n) < (o/n) (o/n) <


(term) (term)

(o/n)

… … … …


… … …

(o/n) < (o/n) (o/n) < (o/n)

Banks

(wholesale)


Liabilities

Money Funds

(prime)

(term) (term)










liquidity tranches.

[2] Global corporate cash

balances (on and offshore).


…

"Cash"

(term)

…

"Cash"

(term)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)



(o/n) … …

…(o/n)


(term) (permanent)

Cash PM

(corporations)

(o/n) (o/n)

"Cash"

(o/n)

… …

T-Bills T-Bills


<(o/n)

Equity

(term) (term) (permanent)

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)


(o/n) < (o/n) (o/n) <


(term) (term)

(o/n)

… … … …


… … …

(o/n) < (o/n) (o/n) < (o/n)

Banks

(wholesale)


Liabilities

Money Funds

(prime)

(term) (term)










liquidity tranches.



[3] Institutional investors’

pooled cash balances.


…

"Cash"

(term)

…

"Cash"

(term)

…

"Cash"

(term)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)



(o/n) … …

…(o/n)


(term) (permanent)

Cash PM

(corporations)

(o/n) (o/n)

"Cash"

(o/n)

… …

T-Bills T-Bills


<(o/n)

Equity


Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves Deposits P-Repos P-Repos "Cash"

(o/n) < (o/n) (o/n) <


(term) (term)

(o/n) (o/n)

… … … …

…

Equity

(temporary)


… … …

(o/n) < (o/n) (o/n) < (o/n)

Banks

(wholesale)


Liabilities

Money Funds

(prime)

(term) (term)










liquidity tranches.



[3] Institutional investors’

pooled cash balances.

[4] Seclenders’ cash colla-

teral reinvestment accounts.


…

"Cash"

(term)

…

"Cash"

(term)

…

"Cash"

(term)

…

"Cash"

(term)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)



(o/n) … …

…(o/n)


(term) (permanent)

Cash PM

(corporations)

(o/n) (o/n)

"Cash"

(o/n)

… …

T-Bills T-Bills


<(o/n)

Equity


Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves Deposits P-Repos P-Repos "Cash"

(o/n) < (o/n) (o/n) <


(collateral)

(term) (term)

(o/n) (o/n)

… … … …

…

Equity

(temporary)


Liabilities

Money Funds

(prime)

Cash PM

(seclenders)

Reserves T-Repos P-Repos P-CNAVs "Cash"

(o/n)

… … …

(o/n) < (o/n) (o/n) < (o/n)

Cash

(term) (term)


Banks

(wholesale)

0

1,000

2,000

3,000

4,000

5,000

6,000

1997 2000 07Q2 13Q3

Reserve managers Corporations Institutional Investors Securities lenders


$ billions

Source: Federal Reserve Z.1, BIS, ICI and author’s calculations 62

Tough to be safe on scale:

[1] Cash pools do not have

access to M0, M1 or M2.


(temporary)

Equity

Equity

P-Loans…

(permanent)

(term)

(permanent)

(term)

…

(term)

Banks

(retail)

Dealer Banks

(credit desk)

(o/n)

(term)

Equity

……

Money Funds

(government-only)

Reserves P-Repos P-Repos

P-Bills

(o/n)

"Cash"

(o/n)

Reserves


P-CNAVs "Cash"

Liabilities

…

"Cash"

…

"Cash"

…

"Cash"

…

(term) (term)

…

…

…

T-Notes

Banks

(wholesale)

P-Loans Deposits

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

T-Notes T-Repos T-Repos "Cash"

(o/n)

Cash PM

(corporations)

Reserves T-Repos T-CNAVs "Cash"

(o/n) (o/n)

…

<

(o/n)

Private Assets

Cash PM

(asset managers)

…

P-Notes

<

P-Repos

(term)

(term)

Deposits

(insured)

(collateral)

Insured

money

Cash PM

(seclenders)

T-Repos P-Repos…

(o/n) (o/n)

"Cash"

Money Funds

(prime)

…

Cash

…

[1]

[1]

…

< (o/n) < (o/n)

T-Bills

T-Repos

(term)

(o/n) < (o/n)

(o/n) < (o/n)

Sovereign

(U.S. Treasury)

Currency

Reserves

T-Bills

Public

money

(o/n)




access to M0, M1 or M2…

…for cash pools, money

begins where M2 ends.

(temporary)

Equity

Equity

P-Loans…

(permanent)

(term)

(permanent)

(term)

…

(term)

Banks

(retail)

Dealer Banks

(credit desk)

(o/n)

(term)

Equity

……

Money Funds

(government-only)

Reserves P-Repos P-Repos

P-Bills

(o/n)

"Cash"

(o/n)

Reserves


P-CNAVs "Cash"

Liabilities

…

"Cash"

…

"Cash"

…

"Cash"

…

(term) (term)

…

…

…

T-Notes

Banks

(wholesale)

P-Loans Deposits

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

T-Notes T-Repos T-Repos "Cash"

(o/n)

Cash PM

(corporations)


(o/n) (o/n)

…

<

(o/n)

Private Assets

Cash PM

(asset managers)

…

P-Notes

<

P-Repos

(term)

(term)

Deposits

(insured)

(collateral)

Insured

money

Cash PM

(seclenders)

T-Repos P-Repos…

(o/n) (o/n)

"Cash"

Money Funds

(prime)

…

Cash

…

[1]

[1]

…

< (o/n) < (o/n)

T-Bills

T-Repos

(term)

(o/n) < (o/n)

(o/n) < (o/n)

Sovereign

(U.S. Treasury)

Currency

Reserves

T-Bills

Public

money

(o/n)





For cash pools, money


[2] Cash pools cannot get

enough U.S. Treasury bills…

[2]


Liabilities

(term) (term) (term)

P-Loans Deposits P-Bills "Cash"

(o/n) (collateral)

… … … …

(o/n) < (o/n) (o/n) < (o/n)

Reserves T-Repos P-Repos P-CNAVs "Cash" Cash

Equity

(term) (term) (temporary)

Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)

… … …

P-Loans Insured

money

P-Notes P-Repos "Cash"

"Cash"

…(o/n) < (o/n) < (o/n) (o/n)…

…

Private Assets

[1]

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves Deposits

(insured)

P-Repos P-Repos

Public

money

T-Bills "Cash" Equity


(o/n) < (o/n) (o/n)

… …

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Reserves T-Bills

(not enough )

T-Repos T-CNAVs "Cash"

…(o/n)

…

T-Notes T-Repos "Cash" Equity


T-Repos "Cash"

…(o/n) < (o/n) (o/n)

… …

Assets

Public Assets

[1]

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

T-Notes Currency

Reserves

T-Repos









…inelastic supply of

public money claims.

[2]


Liabilities

(term) (term) (term)


(o/n) (collateral)

… … … …

(o/n) < (o/n) (o/n) < (o/n)


Equity


Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)

… … …

P-Loans Insured

money


"Cash"

…(o/n) < (o/n) < (o/n) (o/n)…

…

Private Assets

[1]

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves Deposits

(insured)

P-Repos P-Repos

Public

money



(o/n) < (o/n) (o/n)

… …

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Reserves T-Bills

(not enough )


…(o/n)

…



T-Repos "Cash"

…(o/n) < (o/n) (o/n)

… …

Assets

Public Assets

[1]

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

T-Notes Currency

Reserves

T-Repos











[3] Cash pools have limits

on un-secured credit risk…

[3]


Liabilities

(term) (term)

Deposits

(uninsured )

P-Loans P-Bills "Cash"

(o/n) (collateral)

… … … …

(o/n) < (o/n) (o/n) < (o/n)


Equity


Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)

… … …

P-Loans Insured

money


"Cash"

…(o/n) < (o/n) < (o/n) (o/n)…

…

Private Assets

[1]

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves Deposits

(insured)

P-Repos P-Repos

Public

money



(o/n) (o/n) < (o/n) (o/n)

… …

[2]

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Reserves T-Bills

(not enough )


…

…



T-Repos "Cash"

…(o/n) < (o/n) (o/n)

… …

Assets

Public Assets

[1]

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

T-Notes Currency

Reserves

T-Repos













…inelastic demand for

un-insured bank deposits. [3]


Liabilities

(term) (term)

Deposits

(uninsured )

P-Loans P-Bills "Cash"

(o/n) (collateral)

… … … …

(o/n) < (o/n) (o/n) < (o/n)


Equity


Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)

… … …

P-Loans Insured

money


"Cash"

…(o/n) < (o/n) < (o/n) (o/n)…

…

Private Assets

[1]

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves Deposits

(insured)

P-Repos P-Repos

Public

money



(o/n) (o/n) < (o/n) (o/n)

… …

[2]

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Reserves T-Bills

(not enough )


…

…



T-Repos "Cash"

…(o/n) < (o/n) (o/n)

… …

Assets

Public Assets

[1]

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

T-Notes Currency

Reserves

T-Repos













un-insured bank deposits.

[4] Cash pools opt for

second best alternatives…


sha dow

Liabilities

[4]

[4]


P-Loans Deposits

(uninsured )

P-Bills Private "Cash"

(term) (term)

(o/n) (collateral)

… … … …

(o/n) < (o/n) (o/n) < (o/n)

Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)


Equity


[3]

… … …

P-Loans Insured

money


"Cash"

…(o/n) < (o/n) < (o/n) (o/n)…

…

Private Assets

[1]

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves Deposits

(insured)

P-Repos P-Repos

Public

money

T-Bills Public "Cash" Equity

(term) shadow (term) (permanent)

(o/n) (o/n) < (o/n) (o/n)

… …

[2]

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Reserves T-Bills

(not enough )


…

…



T-Repos "Cash"

…(o/n) < (o/n) (o/n)

… …

Assets

Public Assets

[1]

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

T-Notes Currency

Reserves

T-Repos













un-insured bank deposits.

[4] Cash pools opt for

second best alternatives…

…the elastic middle of

shadow money claims.


sha dow

Liabilities

[4]

[4]


P-Loans Deposits

(uninsured )


(term) (term)

(o/n) (collateral)

… … … …

(o/n) < (o/n) (o/n) < (o/n)

Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)


Equity


[3]

… … …

P-Loans Insured

money


"Cash"

…(o/n) < (o/n) < (o/n) (o/n)…

…

Private Assets

[1]

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves Deposits

(insured)

P-Repos P-Repos

Public

money



(o/n) (o/n) < (o/n) (o/n)

… …

[2]

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Reserves T-Bills

(not enough )


…

…



T-Repos "Cash"

…(o/n) < (o/n) (o/n)

… …

Assets

Public Assets

[1]

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

T-Notes Currency

Reserves

T-Repos

Search for safety vs. yield:

Search for yield begins

where the matrix ends…

Onshore:

[5] CD

[6] CPSource: Pozsar (2014)

71

sha dow

Liabilities

[4]

[4]


P-Loans Deposits

(uninsured )


(term) (term)

(o/n) (collateral)

… … … …

(o/n) < (o/n) (o/n) < (o/n)

Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)


Equity


[3]

… … …

P-Loans Insured

money


"Cash"

…(o/n) < (o/n) < (o/n) (o/n)…

…

Private Assets

[1]

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves Deposits

(insured)

P-Repos P-Repos

Public

money



(o/n) (o/n) < (o/n) (o/n)

… …

[2]

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Reserves T-Bills

(not enough )


…

…



T-Repos "Cash"

…(o/n) < (o/n) (o/n)

… …

Assets

Public Assets

[1]

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

T-Notes Currency

Reserves

T-Repos

Search for safety vs. yield:

Search for yield begins

where the matrix ends…

Onshore: Offshore:

[5] CD [7] ECD

[6] CP [8] ECPSource: Pozsar (2014)

72

sha dow

Liabilities

[4]

[4]


P-Loans Deposits

(uninsured )


(term) (term)

(o/n) (collateral)

… … … …

(o/n) < (o/n) (o/n) < (o/n)

Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)


Equity


[3]

… … …

P-Loans Insured

money


"Cash"

…(o/n) < (o/n) < (o/n) (o/n)…

…

Private Assets

[1]

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves Deposits

(insured)

P-Repos P-Repos

Public

money



(o/n) (o/n) < (o/n) (o/n)

… …

[2]

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Reserves T-Bills

(not enough )


…

…



T-Repos "Cash"

…(o/n) < (o/n) (o/n)

… …

Assets

Public Assets

[1]

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

T-Notes Currency

Reserves

T-Repos

RRPs and cash pools:

Unlike individuals, banks

and now shadow banks, cash

pools still do not have a

direct access to the Fed’s

liabilities (the ultimate

form of money, and the sa-

fest of safe assets around).

That is, corporations and

asset managers are still

constrained to holding

mostly shadow money claims.

But the quality of shadow

money claims is now much

better because they are

now backed (at least in

part) by something better

(RRPs) than ever before.


sha dow


Liabilities

P-Loans Deposits

(uninsured )


(term) (term)

(o/n) (collateral)

… … … …

(o/n) < (o/n) (o/n) < (o/n)

Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)

Reserves T-Repos RRPs P-CNAVs "Cash" Cash

Equity


[3]

… … … …

P-Loans Insured

money


P-Repos "Cash"

…(o/n) < (o/n) < (o/n) (o/n)…

Private Assets

[1] [4]

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves Deposits

(insured)

RRPs

…

Public

money



RRPs T-CNAVs "Cash"

…(o/n) (o/n) < (o/n) (o/n)

…

Equity


[2]

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Currency

Reserves

(o/n)

… … …

T-Notes T-Repos "Cash"

Cash PM

(reserve managers)

T-Notes RRPs

(o/n)

RRPs T-Repos "Cash"

…(o/n)

Assets

Public Assets

[1] [4]

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

< (o/n)

Reserves T-Bills

(not enough )

RRPs and cash pools:

Consider RRPs potential as

a macro-prudential tool.

Required minimum RRP balan-

ces for shadow banks could

become equivalent to what

minimum reserve requirements

are for traditional banks.

The implementation of mini-

mum RRP balances would in-

crease the safety of shadow

money claims further still.

This could be an evolution-

ary step toward Mehrling’s

“dealer of last resort” in

Bagehot 21st century sense.


sha dow


Liabilities

P-Loans Deposits

(uninsured )


(term) (term)

(o/n) (collateral)

… … … …

(o/n) < (o/n) (o/n) < (o/n)

Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)

Reserves T-Repos RRPs P-CNAVs "Cash" Cash

Equity


[3]

… … … …

P-Loans Insured

money


P-Repos "Cash"

…(o/n) < (o/n) < (o/n) (o/n)…

Private Assets

[1] [4]

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves Deposits

(insured)

RRPs

…

Public

money



RRPs T-CNAVs "Cash"

…(o/n) (o/n) < (o/n) (o/n)

…

Equity


[2]

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Currency

Reserves

(o/n)

… … …


Cash PM

(reserve managers)

T-Notes RRPs

(o/n)

RRPs T-Repos "Cash"

…(o/n)

Assets

Public Assets

[1] [4]

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

< (o/n)

Reserves T-Bills

(not enough )

0

500

1,000

1,500

2,000

2,500

Private Shadow Money Public Shadow Money Insured Money Public Money

Q3-13

Demand Deposits Dealer Repos [o/n] Securities Loaned CNAVs [Institutional Class] T-Bills

Cash pools’ access to overnight money:

$ billions

75Source: Haver, Federal Reserve Board, Federal Reserve Bank of New York, FDIC

0

500

1,000

1,500

2,000

2,500

Private Shadow Money Public Shadow Money Insured Money Public Money

Q3-13

Demand Deposits Dealer Repos [o/n] Securities Loaned CNAVs [Institutional Class] T-Bills

Not all un-insured demand deposits belong to cash pools:

$ billions

76Source: Haver, Federal Reserve Board, Federal Reserve Bank of New York, FDIC

Banks with $50 < assets < $100 billion:

4,200 accts., each $2.2 million on avg.

Banks with assets of over $100 billion:

24,800 accts, each $2.9 million on avg.

0

500

1,000

1,500

2,000

2,500

Public Money Private Shadow Money Public Shadow Money Insured Money

Q3-13

T-Bills T-Notes w/ RM < 1 yr. Savings and Small TDs Large TDs Dealer Repos [term] Secs. Loaned

Cash pools’ access to term money:

$ billions

77Source: Haver, Federal Reserve Board, Federal Reserve Bank of New York

0

500

1,000

1,500

2,000

2,500

Public Money Private Shadow Money Public Shadow Money Insured Money

Q3-13

T-Bills T-Notes w/ RM < 1 yr. Savings and Small TDs Large TDs Dealer Repos [term] Secs. Loaned

Not all large time deposits belong to cash pools:

$ billions

78Source: Haver, Federal Reserve Board, Federal Reserve Bank of New York

We do not know what share of large time deposits

belong to cash pools vs. SMEs and the wealthy.


79







Money creation:

Retail banks create money

and credit ex nihilo (see

for example Turner, 2013).

Clear links to the real

economy through loans.


Liabilities

(local) (term) (term)

P-Repos P-CNAVs "Cash"

(o/n) < (o/n) (o/n)

(term)


< (o/n) (o/n)

… … … …

(collateral)

Cash

"Cash"

(term)

Banks

(wholesale)

…P-Loans

(local)

Equity

(temporary)

…

Reserves Deposit

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves Deposits

(o/n)

P-Repos P-Repos "Cash"

(term)

Money Funds

(prime)

Cash PM

(seclenders)

…

… … … …

Deposits

(term)

P-Notes P-Repos

Equity


(o/n) < (o/n) < (o/n) (o/n)

…(o/n) (o/n) < (o/n) (o/n)

Reserves T-Bills

(o/n)


Assets

Public Assets

… …

Private Assets

…

T-Bills

(term)

T-Bills "Cash"


Money Funds

(government-only)

Cash PM

(corporations)

Sovereign

(U.S. Treasury)

(o/n)

… … …


Cash PM

(reserve managers)

T-Notes Currency

Reserves

T-Repos T-Repos "Cash"

…(o/n) <

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

(o/n)

(o/n)

T-Notes Currency

Reserves


…(o/n) < (o/n) (o/n)

(o/n) … … …


Cash PM

(reserve managers)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Reserves T-Bills

(o/n)


Equity


Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Assets

Public Assets

T-Bills

(term)



…(o/n) (o/n) < (o/n) (o/n)

… … …

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves Deposits

(o/n)


…(o/n) < (o/n) < (o/n) (o/n)…

…Equity

(local) (term) (term) (temporary)

… … … …

P-Loans Deposits

(term)


Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)

Reserves Deposit P-Repos P-CNAVs "Cash" Cash

(term)


(o/n) (collateral)

… … … …

(o/n) < (o/n) (o/n) < (o/n)


Liabilities



Money dealing:

Money dealing is borrowing

and lending of short-term

money in the unsecured and

secured and local and global

(Eurodollar) money markets.

There are at least six

forms of money dealing…

T-Notes Currency

Reserves


…(o/n) < (o/n) (o/n)

(o/n) … … …


Cash PM

(reserve managers)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Reserves T-Bills

(o/n)


Equity


Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Assets

Public Assets

T-Bills

(term)



…(o/n) (o/n) < (o/n) (o/n)

… … …

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves FF

(o/n)


…(o/n) < (o/n) < (o/n) (o/n)…

…Equity


… … … …

P-Loans Deposits

(term)


Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)

FF FF P-Repos P-CNAVs "Cash" Cash[1]

(term)


(o/n) (collateral)

… … … …

(o/n) < (o/n) (o/n) < (o/n)


Liabilities



Money dealing:

[1] Interbank money dealing

in the federal funds market.

(o/n)

(o/n) … … …


Cash PM

(reserve managers)

Currency

Reserves


…(o/n) <

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

(o/n)

[2]T-Notes

Reserves T-Bills

(o/n)


Equity


Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Assets

Public Assets

T-Bills

(term)



…(o/n) (o/n) < (o/n) (o/n)

… … …

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves FF

(o/n)

P-Repos P-Repos

…

P-Loans Deposits

(term)


"Cash"

…(o/n) < (o/n) < (o/n) (o/n)…

…

Cash PM

(seclenders)

[1] FF FF P-Repos P-CNAVs "Cash" Cash

Equity


Banks

(wholesale)

Money Funds

(prime)

… … …

(term)


(o/n) (collateral)

… … … …

(o/n) < (o/n) (o/n) < (o/n)


Liabilities



Money dealing:



[2] Interdealer money dea-

ling in the GCF repo market.

T-Notes Currency

Reserves

[2] T-Repos T-Repos "Cash"

…(o/n) < (o/n) (o/n)

(o/n) … … …


Cash PM

(reserve managers)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Reserves T-Bills

(o/n)


Equity


Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Assets

Public Assets

T-Bills

(term)



…(o/n) (o/n) < (o/n) (o/n)

… … …

[3]

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves FF

(o/n)

P-Repos P-Repos

…

P-Loans Deposits

(term)


"Cash"

…(o/n) < (o/n) < (o/n) (o/n)…

…

Cash PM

(seclenders)

[1] FF FF P-Repos P-CNAVs "Cash" Cash

Equity


(term)


(o/n) (collateral)

… … … …

(o/n) < (o/n) (o/n) < (o/n)

[3]


Liabilities


Banks

(wholesale)

Money Funds

(prime)

… … …


Money dealing:





[3] Interlinked money dea-

ling in the TRP repo market

(cash PM -> MMF -> dealer).

Cash PM

(reserve managers)

T-Notes Currency

Reserves


…(o/n)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

< (o/n)

Equity


Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

(o/n)

(o/n) … … …


(o/n) (o/n) < (o/n) (o/n)

… … …

Reserves T-Bills

(o/n)

[3] T-Repos T-CNAVs

Assets

Public Assets

T-Bills

(term)

T-Bills "Cash"

(o/n) (o/n)

Equity


"Cash"

…

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves FF

(o/n)


…(o/n) < (o/n) < …

Equity


… … … … …

P-Loans Deposits

(term)


Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)

[1] FF FF [3] P-Repos P-CNAVs "Cash" Cash

(o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … …


Liabilities

(global) (term) (term) (term)

P-Loans Deposits P-Bills "Cash"[4]


Money dealing:








[4] Interoffice money dea-

ling via the NY branches

of foreign banks, funded

by selling Yankee CD and

CP to prime money funds

(see Shin, 2011 and 2013).

Cash PM

(reserve managers)

T-Notes Currency

Reserves


…(o/n)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

< (o/n)

Equity


Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

(o/n)

(o/n) … … …


(o/n) (o/n) < (o/n) (o/n)

… … …

Reserves T-Bills

(o/n)

[3] T-Repos T-CNAVs

Assets

Public Assets

T-Bills

(term)

T-Bills "Cash"

(o/n) (o/n)

Equity


"Cash"

…

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves FF

(o/n)


…(o/n) < (o/n) < …

Equity


… … … … …

P-Loans Deposits

(term)


…… … … …

Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)




Liabilities

(global) (term) (global) (o/n) (term)

[5][4] P-Loans Deposits P-Bills P-CNAVs "Cash"


Money dealing:








[4] Interoffice money dea-

ling via the NY branches

of foreign banks, funded

by selling Yankee CD and

CP to prime money funds

(see Shin, 2011 and 2013).

[5] Crossborder money dea-

ling via the headquarters

of foreign banks selling

Eurodollar CD and CP to

prime money market funds.

Cash PM

(reserve managers)

T-Notes Currency

Reserves


…(o/n)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

< (o/n)

Equity


Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

(o/n)

(o/n) … … …


[6]

(o/n) (o/n) < (o/n) (o/n)

… … …

Reserves T-Bills

(o/n)

[3] T-Repos T-CNAVs

Assets

Public Assets

T-Bills

(term)

T-Bills "Cash"

(o/n) (o/n)

Equity


"Cash"

…

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

Reserves FF

(o/n)

[6] P-Repos P-Repos "Cash"

…(o/n) < (o/n) < …

Equity


… … … … …

P-Loans Deposits

(term)


Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)



… … … …

Liabilities

"Cash"

(global) (term) (global) (term)

[4] P-Loans Deposits [5] P-Bills

Public Backstops Private BackstopsSource: Pozsar (2014)

87

Money dealing:

[6] Client-driven money dea-

ling in the DvP repo market.

Money dealing:



Dealers’ buy-side clients:

risk portfolio managers (PM).

88Source: Pozsar (2014)

Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

(term)

Reserves P-Repos

(o/n) <

(o/n)

P-Repos

Sovereign

(U.S. Treasury)

<

…P-Loans

(local)

Deposits

(term)

Banks

(wholesale)

… …

T-Repos

(o/n)

…

"Cash"

Money Funds

(government-only)

…

Cash PM

(reserve managers)


T-Notes T-Repos

(o/n)

Cash PM

(corporations)


…

"Cash"

(permanent)

…

Equity

(term)

"Cash"

(term)

Cash PM

(seclenders)

"Cash"

(o/n) < (o/n) (o/n)

(o/n)

…

Money Funds

(prime)

…

Equity

(temporary)

(o/n) <

P-Repos

(o/n)

Cash PM

(asset managers)

Equity

(term) (permanent)(term)

Liabilities

(global) (term) (global)

(o/n) (o/n)

… … …


(term)

< (o/n) <

…

"Cash"

Risk PM

Risk PM

Risk PM


(term)

… … …

P-Notes P-Repos

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

… …

T-Bills

Cash

(collateral)

FF FF

(o/n) (o/n)

(o/n)

Currency

Reserves

T-Bills

(o/n)

T-Bills

(term)

FF

(o/n)

"Cash"P-CNAVs

(o/n)

Money dealing:



Mandate: “Beat benchmark”.

Three forms of leverage…


Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

(term)

Reserves P-Repos

(o/n) <

(o/n)

P-Repos

Sovereign

(U.S. Treasury)

<

…P-Loans

(local)

Deposits

(term)

Banks

(wholesale)

… …

T-Repos

(o/n)

…

"Cash"

Money Funds

(government-only)

…

Cash PM

(reserve managers)


T-Notes T-Repos

(o/n)

Cash PM

(corporations)


…

"Cash"

(permanent)

…

Equity

(term)

"Cash"

(term)

Cash PM

(seclenders)

"Cash"

(o/n) < (o/n) (o/n)

(o/n)

…

Money Funds

(prime)

…

Equity

(temporary)

(o/n) <

P-Repos

(o/n)

Cash PM

(asset managers)

Equity

(term) (permanent)(term)

Liabilities

(global) (term) (global)

(o/n) (o/n)

… … …


(term)

< (o/n) <

…

"Cash"

Risk PM

Risk PM

Risk PM


(term)

… … …

P-Notes P-Repos

Private Assets

Banks

(retail)

Dealer Banks

(credit desk)

… …

T-Bills

Cash

(collateral)

FF FF

(o/n) (o/n)

(o/n)

Currency

Reserves

T-Bills

(o/n)

T-Bills

(term)

FF

(o/n)

"Cash"P-CNAVs

(o/n)

Money dealing:





Type 1:


T-Repos "Cash"

…(o/n) < (o/n) (o/n)

(o/n)

T-Notes Currency

Reserves

T-Repos

Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

… … …


Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

…(o/n) (o/n) < (o/n) (o/n)

… … …

Reserves T-Bills

(o/n)


T-Bills

(term)



"Cash"

…(o/n) < (o/n) < (o/n) (o/n)

… …

Reserves FF

(o/n)

P-Repos P-Repos

Equity


… … …

P-Loans Deposits

(term)


Risk PM Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)

FF FF P-Repos P-CNAVs

Private Assets

Risk PMBanks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

"Cash" Cash


… … … …



Liabilities

"Cash"


Money dealing:





Type 1:

Type 2:


T-Repos "Cash"

…(o/n) < (o/n) (o/n)

(o/n)

T-Notes Currency

Reserves

T-Repos

Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

… … …


Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

…(o/n) (o/n) < (o/n) (o/n)

… … …

Reserves T-Bills

(o/n)


T-Bills

(term)



"Cash"

…(o/n) < (o/n) < (o/n) (o/n)

… …

Reserves FF

(o/n)

P-Repos P-Repos

Equity


… … …

P-Loans Deposits

(term)


Risk PM Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)


Private Assets

Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

"Cash" Cash


… … … …



Liabilities

"Cash"


Money dealing:





Type 1:

Type 2:

Type 3:


T-Repos "Cash"

…(o/n) < (o/n) (o/n)

(o/n)

T-Notes Currency

Reserves

T-Repos

Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

… … …


Assets

Public Assets

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

…(o/n) (o/n) < (o/n) (o/n)

… … …

Reserves T-Bills

(o/n)


T-Bills

(term)



"Cash"

…(o/n) < (o/n) < (o/n) (o/n)

… …

Reserves FF

(o/n)

P-Repos P-Repos

Equity


… … …

P-Loans Deposits

(term)


Risk PM

(cash for margining)

Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)


Private Assets

Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

"Cash" Cash


… … … …



Liabilities

"Cash"


Money dealing:





Type 1:

Type 2:

Type 3:


T-Notes

(RMBS)

T-Repos

(term)

Public Assets

Assets

T-Bills

(term)

(o/n)

…

Reserves T-Bills

(o/n)

Risk PM

(M-REIT)

Sovereign

(U.S. Treasury)

…

Equity


Liabilities

"Cash"


(collateral)

… … … …


Risk PM


Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)


Private Assets

Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

"Cash" Cash

(o/n) < (o/n) (o/n) < (o/n) (o/n)

Equity


… … …

P-Loans Deposits

(term)


(o/n) < (o/n) < (o/n) (o/n)

… …

Reserves FF

(o/n)

P-Repos P-Repos

(permanent)

…(o/n) < (o/n) (o/n)

… …

"Cash"

…


(term) (term)(temporary)

(term) < (term) (o/n)

(o/n)

Equity

Money Funds

(government-only)

Cash PM

(corporations)




Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

T-Notes T-Repos

… … …

Currency

Reserves

T-Repos "Cash"

…


Money dealing:





Type 1:

Type 2:

Type 3:

(term) (o/n)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)


Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Public Assets

(o/n) … … …


T-CNAVs

…Reserves (term) <

"Cash"

…(term) (o/n) (o/n) < (o/n) (o/n)

…

T-Notes T-Repos Reserves T-Bills

(o/n)

T-Repos

Equity

(temporary) (term) (term) (permanent)

… … …

Equity

Assets

T-Bills

(term)

T-Bills "Cash"

Private Assets

Equity

(temporary)

…

Risk PM

("real money")

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(short seller)

Reserves FF

(o/n)

P-Repos P-Repos "Cash"T-Notes

P-Notes

Equity


…(o/n) < (o/n) < (o/n) (o/n)

… …

P-Loans Deposits

(term)

P-Notes P-Repos "Cash"… …

Risk PM


Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)

FF FF P-Repos P-CNAVs "Cash" Cash


… … … …

Liabilities

"Cash"





Money dealing:





Type 1:

Type 2:

Type 3:

(

(term) (o/n)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)


Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Public Assets

(o/n) … … …


T-CNAVs


"Cash"

…(term) (o/n) (o/n) < (o/n) (o/n)

…


(o/n)

T-Repos

Equity


… … …

Equity

Assets

T-Bills

(term)

T-Bills "Cash"

(o/n)

P-Repos P-Repos

(o/n) < (term) < (o/n)

Risk PM

(seclender)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(short seller)

Cash P-Repos Reserves P-ReposFF [A]

(collat.)

Shorts

(P-Notes)


Risk PM


Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)


Private Assets …

T-Notes

P-Notes

…

Equity… … … …



Liabilities

"Cash"


(temporary)

…

(term)

"Cash" Cash

Equity


P-Loans Deposits

(term)


(o/n)

… … … … …


Money dealing:





Type 1:

Type 2:

Type 3:

(

[B]

(term) (o/n)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)


Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Public Assets

(o/n) … … …


T-CNAVs


"Cash"

…(term) (o/n) (o/n) < (o/n) (o/n)

…


(o/n)

T-Repos

Equity


… … …

Equity

Assets

T-Bills

(term)

T-Bills "Cash"

Risk PM

(seclender)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(short seller)

Shorts

(collat.) (term) (o/n) < (o/n) (term) < (o/n) (o/n) (P-Notes)

Cash P-Repos [A] Reserves FF P-Repos P-Repos P-Repos

…

Private Assets … … … …

Equity

P-Notes (temporary) (local) (term) (term) (temporary)

… …

T-Notes Equity P-Loans Deposits

(term)



Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)

Liabilities

"Cash"



(collat.)

Risk PM



… … … …

"Cash" Cash

(o/n) < (o/n) (o/n) < (o/n) (o/n)


Money dealing:





Type 1:

Type 2:

Type 3:

(

Equity

(temporary)

…

CDS

IRS

…

CDS

IRS

FXS

T-Notes

P-Notes

… … … …

"Cash" Cash

(o/n) < (o/n) (o/n) <


Liabilities

"Cash"




(o/n) (o/n) (collat.)


…

Private Assets … … … … … FXS


(term)

P-Notes P-Repos "Cash" Equity

Risk PM Banks

(wholesale)

Money Funds

(prime)

Cash PM

(seclenders)(tactical hedger)

(collat.) (term) (o/n) < (o/n) (term) < (o/n) (o/n)

Cash P-Repos Reserves FF P-Repos P-Repos "Cash"

Equity


… … …

Equity

Assets

T-Bills

(term)

T-Bills "Cash"

Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

("overlay investor")

"Cash"

…(term) (o/n) (o/n) < (o/n) (o/n)

…


(o/n)

T-Repos

Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Public Assets

(o/n) … … …


T-CNAVs

…Reserves (term) < (term) (o/n)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)



Money dealing:





Type 1:

Type 2:

Type 3:

(

Liabilities

(term)


"Cash"

P-Notes (temporary) (global) (term)


(o/n) (collat.)

FXS … … …

IRS … (o/n) < (o/n)

CDS FF FF

Equity


"Cash" Cash

… …



(term)


Risk PM Banks

(wholesale)

Cash PM


CDS

(collat.) (term) (o/n) < (o/n) (term) < (o/n) (o/n) IRS

Cash P-Repos Reserves FF P-Repos P-Repos "Cash"

Equity

(temporary) (term) (permanent)

… …

Equity

Assets

T-Bills

(term)

"Cash"

Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM


"Cash"

…(term) (o/n) (o/n)

…


(o/n)

Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Cash PM

(corporations)

Public Assets

(o/n) … … …



Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)



Money dealing:





Type 1:

Type 2:

Type 3:

(

Liabilities

…

(term)


Swaps P-Bills "Cash"

(collat.) (o/n) (collat.)

Cash

… FXS

(o/n) (o/n) IRS

FF Swaps

P-Notes (temporary) (global) (term) (uncoll.) (term)


Deposits

(term)


FXS … … … … …

Swaps "Cash"

IRS … (o/n) < (o/n) (collat.) <

CDS FF

… …


P-Repos "Cash"

Risk PM Banks

(wholesale)

Dealer Banks

(CDS)

Cash PM


Equity


T-Notes Equity P-Loans

CDS

(collat.) (term) (o/n) < (o/n) (term) <

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM


Cash P-Repos Reserves FF P-Repos

Equity

(temporary) (uncoll.) (term) (term) (permanent)

… … …

Equity

Assets

T-Bills

(term)


Risk PM

(cash for shorting)

"Cash"

…(term) (o/n) (collat.) < (collat.) (o/n)

…


(o/n)

Swaps

Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(corporations)

Public Assets

(o/n) … … …


Swaps


Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)



Money dealing:





Type 1:

Type 2:

Type 3:

(

"Cash" Cash

Cash P-Repos Reserves FF P-Repos P-Repos "Cash" CDS

Risk PM Banks

(wholesale)

Dealer Banks

(CDS)

Cash PM


"Cash" Equity

P-Notes (temporary) (local)

Liabilities

CDS FF FF Swaps Swaps

Private Assets

(term)






FXS … … … … …



… … FXS


(term)

P-Notes P-Repos

… … … … …

(collat.) (term) (o/n) < (o/n) (term)

Equity


< (o/n) (o/n) IRS

Equity

Assets

T-Bills

(term)


Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM


"Cash"


…


(o/n)

Swaps

… … … …

Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(corporations)

Public Assets

(o/n) … … …


Swaps


Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)



Money dealing:





Type 1:

Type 2:

Type 3:

(

Liabilities

T-Bills

(o/n)

(term)




… … FXS

< (o/n)



FXS … … … … …

Swaps "Cash" Cash


CDS FF FF Swaps

Banks

(wholesale)

Dealer Banks

(CDS)

Cash PM


"Cash" Equity



(term)

P-Notes P-Repos

Cash P-Repos Reserves FF

(o/n) IRS

… …

Private Assets … … …

P-Repos P-Repos "Cash" CDS

(collat.) (term) (o/n) < (o/n) (term)

Risk PM

Equity


… … … …

Equity

Assets

T-Bills

(term)


Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM


"Cash"


…

T-Notes T-Repos Reserves Swaps

Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(corporations)

Public Assets

(o/n) … … …


Swaps


Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)



Money dealing:





Type 1:

Type 2:

Type 3:

(

…

Liabilities

(term)



FXS (temporary) (global) (term) (uncoll.) (term)

IRS Equity P-Loans Deposits


CDS … … … … ……

Margin

call

Swap

payables (o/n) < (o/n) (collat.) <

FF FF Swaps

(tactical hedger)

Equity


Swaps "Cash" Cash

IRS

… …



(term)


Risk PM Banks

(wholesale)

Dealer Banks

(CDS)

Cash PM

(seclenders)

(collat.) (term) (o/n) < (o/n) (term) < (o/n) receivs.

Cash P-Repos Reserves FF P-Repos P-Repos Swap CDS

"Cash" Equity


… … … … …

Equity

Assets

T-Bills

(term)

Swaps P-Bills

Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM


"Cash"

…(term) (o/n) (o/n) (collat.) < (collat.) (o/n)

T-Notes T-Repos Reserves T-Bills Swaps

Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(corporations)

Public Assets

(o/n) … … …


Swaps


Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)



Money dealing:





Type 1:

Type 2:

Type 3:

(

…

Liabilities

…

Equity

(temporary)


FXS (global) (term) (uncoll.) (term) (term)

P-Loans Deposits Swaps P-Bills

CDS … … … … …

IRS "Cash"

"Cash" Cash

(o/n) < (o/n) (collat.) < (collat.)

Cash

(margin)

P-Repos

(o/n)

FF FF

(o/n) (collat.)

Swaps Swaps

Cash PM


Equity


IRS

… …


[A]

… FXS


(term)


Risk PM Banks

(wholesale)

Dealer Banks

(CDS)

(collat.) (term) (o/n) < (o/n) (o/n) < (o/n) receivs.


"Cash" Equity


… … … … …

Equity

Assets

T-Bills

(term)

Swaps P-Bills

Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM


"Cash"



Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(corporations)

Public Assets

(o/n) … … …


Swaps


Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)



Money dealing:





Type 1:

Type 2:

Type 3:

(

…CDS …

Swaps P-Bills "Cash"IRS Equity P-Loans Deposits

… … … … …

"Ca sh"


Liabilities

(term)FXS (temporary) (global) (term) (uncoll.) (term)


(term) (temporary)

Cash

(margin)

FF FFP-Repos

(o/n)

[A]

Risk PM Banks

(wholesale) (seclenders)

Cash PM

[B]

Swaps Swaps Cash

(o/n) < (o/n) (collat.) <

IRS

… …

Private Assets … … … … FXS


(term)


Dealer Banks

(CDS)(tactical hedger)

Equity

P-Notes (temporary) (local) (term)

(collat.) (term) (o/n) < (o/n) (o/n) < (o/n) receivs.


"Cash" Equity


… … … … …

Equity

Assets

T-Bills

(term)

Swaps P-Bills

Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM


"Cash"



Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(corporations)

Public Assets

(o/n) … … …


Swaps


Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)



Where is the real economy?

Money market funding of

capital market lending

(see Mehrling et al, 2013).

(

…

(term) (o/n)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)


Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(corporations)

Public Assets

(o/n) … … …


Swaps


"Cash"



"Cash" Equity


… … … … …

Equity

Assets

T-Bills

(term)

Swaps P-Bills

Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)


(collat.) (term) (o/n) < (o/n) (o/n) < (o/n) (o/n) IRS

… …


(term) (temporary)

FXS


(term)

P-Notes P-Repos "Cash" Equity

(collat.)

CDS … … … … … …

Cash

(o/n) (o/n) < (o/n) (collat.) <

FF FF Swaps Swaps

(seclenders)




"Cash"

…


Liabilities

(term)

(collat.) (o/n)

Risk PM Banks

(wholesale)

Dealer Banks

(CDS)

Cash PM


Cash

(margin)

P-Repos

P-Notes (temporary) (local) (term)




capital market lending…

[1] Funded risk PMs’

securities portfolios,…

(

…

(term) (o/n)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)


Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(corporations)

Public Assets

(o/n) … … …


Swaps


"Cash"

…(global) (term) (o/n) (o/n) (collat.) < (collat.) (o/n)


"Cash" Equity


… … … … …

Equity

Assets

T-Bills

(term)

Swaps P-Bills

Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)


(collat.) (term) (o/n) < (o/n) (o/n) < (o/n) (o/n) IRS

… …



… FXS


(term)


(collat.)

CDS … … … … … …

"Cash" Cash

(o/n) (o/n) < (o/n) (collat.) < (collat.)

FF FF Swaps Swaps




[1]


Liabilities

(term)

(o/n)

Risk PM Banks

(wholesale)

Dealer Banks

(CDS)

Cash PM

(cash for margining) (seclenders)

Cash

(margin)

P-Repos

Equity

P-Notes (temporary) (local)





[2] Foreign banks’ USD


(

…

(term) (o/n)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)


Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(corporations)

Public Assets

(o/n) … … …


Swaps


(global) (term) (o/n) (o/n) (collat.) < (collat.)

[1] T-Notes T-Repos Reserves T-Bills

(o/n)

… … … … …

Swaps "Cash"

…

Equity


Equity

Assets

T-Bills

(term)


Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

P-Repos "Cash" CDS

(collat.) (term) (o/n) < (o/n) (o/n) <


(o/n) (o/n) IRS

… …


Equity


… FXS


(term)


Risk PM Banks

(wholesale)

Dealer Banks

(CDS)

Cash PM


Cash

(margin)

P-Repos "Cash" Cash


FF FF Swaps Swaps

(o/n) (collat.)

CDS … … … … … …



IRS Equity [2] P-Loans Deposits


Liabilities

(term)





[3] Large U.S. banks’


(

…


Liabilities

(term) (term)[3]


FXS (temporary) (global) (term) (uncoll.)

IRS Equity [2] P-Notes Deposits

(o/n) (collat.)

CDS … … … … … …

"Cash" Cash


FF FF Swaps Swaps

Risk PM Banks

(wholesale)

Dealer Banks

(CDS)

Cash PM


Cash

(margin)

P-Repos

Equity


… FXS


(term)


(o/n) (o/n) IRS

… …


P-Repos "Cash" CDS



Equity


Equity

Assets

T-Bills

(term)


Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

(o/n)

… … … … …

Swaps "Cash"

…(global) (term) (o/n) (o/n) (collat.) < (collat.)


Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(corporations)

Public Assets

(o/n) … … …


Swaps


Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)






[4] Dealer banks’ securities

inventories (net financing).

(

…


Liabilities

(uncoll.) (term) (term)


FXS (temporary) [3] (global) (term)


(o/n) (collat.)

CDS … … … … … …

"Cash" Cash


FF FF Swaps Swaps

Risk PM Banks

(wholesale)

Dealer Banks

(CDS)

Cash PM


Cash

(margin)

P-Repos

Equity

P-Notes (temporary) (local) (term) (term) (temporary)(global)

… FXS


(term)

[4] P-Notes P-Repos "Cash"

(o/n) (o/n) IRS

… …


P-Repos "Cash" CDS



Equity


Equity

Assets

T-Bills

(term)


Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

(o/n)

… … … … …

Swaps "Cash"



Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(corporations)

(global)

Public Assets

(o/n) … … …

[4] T-Notes T-Repos "Cash"

Swaps


Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)



Not all repos are equal:

Most repos are responsible

for facilitating price dis-

covery in a market making

context, but not funding

the real economy directly.

(

…

[Ø]

[Ø]


Liabilities

(uncoll.) (term)

Risk PM Banks

(wholesale)

Dealer Banks

(CDS)

(o/n)

P-Repos

FF FF Swaps Swaps

(term)


FXS (temporary) [3] (global) (term)


(o/n) (collat.)

CDS … … … … … …


P-Notes (temporary) (local) (global) (term) (term) (temporary)

"Cash" Cash

… …



(term)

[4] P-Notes P-Repos "Cash"

Cash PM


Cash

(margin)

P-Repos

Equity

"Cash" CDS



(o/n) IRS

Equity


Equity

Assets

T-Bills

(term)


Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

(o/n)

… … … … …

Swaps "Cash"



Equity

(global) (term) (term) (permanent)

Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(corporations)

Public Assets

(o/n) … … …

[4] T-Notes T-Repos "Cash"

Swaps


Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)



RRPs and risk PMs:

Through RRPs, the Fed will

have direct control over

haircuts and leverage. Fed

haircuts will be the floor.

(

…

…(o/n) (o/n) < (o/n) (o/n)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

T-Notes RRPs RRPs T-Repos "Cash"


Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Currency

Public Assets

… … … …


(o/n)

… … … …

T-CNAVs "Cash"

…(term) (o/n) (o/n) (o/n) < (o/n)

RRPs


Equity


Equity

Assets

T-Bills

(term)

T-Bills "Cash"

Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

(o/n) IRS

… …


RRPs P-Repos "Cash" CDS

(collat.) (term) (o/n) < (o/n) (o/n)

… FXS


(term)

P-Notes P-Repos

Cash PM


RRPs

"Cash" Equity


Cash

(margin)

P-Repos FF FF

Risk PM Banks

(wholesale)

"Cash" Cash

(o/n) (o/n) < (o/n) (o/n) <

IRS Equity P-Notes Deposits


CDS … … … … …

(term)

P-Bills "Cash"

FXS (temporary) (global) (term)

Reserves


Liabilities

(term)

P-CNAVs

Money Funds

(prime)

…

< (o/n)

(global)


RRPs and risk PMs:

Fed will have control over

market-based credit cycles.

This will raise the cost of

leverage for risk PMs and

reduce seclending volumes.

(

…

…(o/n) (o/n) < (o/n) (o/n)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)

T-Notes RRPs RRPs T-Repos "Cash"


Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Money Funds

(government-only)

Cash PM

(corporations)

Currency

Public Assets

… … … …


(o/n)

… … … …

T-CNAVs "Cash"

…(term) (o/n) (o/n) (o/n) < (o/n)

RRPs


Equity


Equity

Assets

T-Bills

(term)

T-Bills "Cash"

Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

(o/n) IRS

… …


RRPs P-Repos "Cash" CDS


… FXS


(term)

P-Notes P-Repos

Cash PM


RRPs

"Cash" Equity


Cash

(margin)

P-Repos FF FF

Risk PM Banks

(wholesale)

"Cash" Cash

(o/n) (o/n) < (o/n) (o/n) <



CDS … … … … …

(term)

P-Bills "Cash"


Reserves


Liabilities

(term)

P-CNAVs

Money Funds

(prime)

…

< (o/n)

(global)


113






114

“If you can’t explain it to

a six year old you don’t un-

derstand it yourself.”

Albert Einsteinxxxx

Source: Pozsar (2014)

(

…


Liabilities

(uncoll.) (term) (term)





CDS … … … … … …

Swaps "Cash" Cash

(o/n) (o/n) < (o/n) (collat.) <

Cash

(margin)

P-Repos FF FF

Risk PM Banks

(wholesale)

Dealer Banks

(CDS)

Cash PM


Swaps

"Cash" Equity


… … FXS


(term)

P-Notes P-Repos

< (o/n) (o/n) IRS

… …


P-Repos P-Repos "Cash" CDS



Equity


Equity

Assets

T-Bills

(term)


Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)

Cash PM

(asset managers)

(o/n)

… … … … …

Swaps "Cash"



Equity


Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(corporations)

Public Assets

(o/n) … … …


Swaps


Central Bank

(Federal Reserve)

Dealer Banks

(government desk)

Cash PM

(reserve managers)





Albert Einsteinxxxx


…

(

…

FXS

CDS

IRS"Cash"


Liabilities

(uncoll.) (term)

Swaps P-Bills



CDS … … … … …


FF FF Swaps Swaps

Risk PM Banks

(wholesale)

Dealer Banks

(CDS)(cash for margining)

Cash

(margin)

P-Repos

P-Notes (temporary) (local) (global) (term)


(term)

P-Notes P-Repos

(o/n)

… …


P-Repos


Risk PM

(cash for shorting)

Banks

(retail)

Dealer Banks

(credit desk)


Equity

(temporary) (uncoll.) (term) (temporary)

… … … …

Equity

Assets

T-Bills

(term)

Swaps P-Bills

(global) (term) (o/n) (o/n) (collat.) < (collat.)


(global) (term)

Risk PM

(cash for funding)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(search for safety)

Public Assets

(o/n) … …

T-Notes T-Repos

Swaps

Reserves (term) < (term)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)





Albert Einsteinxxxx


…

CDS

IRS

FXS


Liabilities

(uncoll.) (term)

Swaps P-Bills

(global) (term)

P-Notes Deposits

… … … …


FF FF Swaps Swaps

Banks

(wholesale)

Dealer Banks

(CDS)

(local) (global) (term)

P-Loans Deposits

(term)

P-Notes P-Repos

(o/n)


P-Repos

(o/n) < (o/n) (o/n) <

Reserves FF P-Repos

Equity


Equity

Assets

T-Bills

(term)

Swaps P-Bills

Banks

(retail)

Dealer Banks

(credit desk)

… … … … FXS

"Cash"CDS

P-Notes P-Repos (o/n) (o/n) (collat.) < (collat.) IRS


(global) (term)

Risk PM

(search for yield)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(search for safety)

Public Assets

(o/n) … …

T-Notes T-Repos

Swaps

Reserves (term) < (term)

Central Bank

(Federal Reserve)

Dealer Banks

(government desk)





Albert Einsteinxxxx


…

Money Dealers

(cash for collateral)

Money Dealers



Liabilities

(uncoll.) (term)

Swaps P-Bills

(global) (term)

P-Notes Deposits

… … … …


FF FF Swaps Swaps

Banks

(wholesale)

Dealer Banks

(CDS)

(local) inventory (net)

P-Loans Deposits

(term)

Trading Financing

books


Matched

(o/n) < (o/n) books <

Reserves FF Matched


Banks

(retail)

FXS

IRS Equity

Assets

T-Bills

(term)

Swaps P-Bills Equity

FXS

CDS … … … …

"Cash"CDS

P-Notes P-Repos (o/n) (o/n) (collat.) < (collat.) IRS


inventory (net)

Risk PM

(search for yield)

Sovereign

(U.S. Treasury)

Dealer Banks

(IRS and FXS)

Cash PM

(search for safety)

Public Assets

(o/n) … …

Trading Financing

Swaps

Reserves books < books

Central Bank

(Federal Reserve)

T-Notes Currency Matched Matched




Albert Einsteinxxxx


…


Liabilities

inventory (net)

Trading Financing

(global) (term)

P-Notes Deposits

… … … …

(o/n) < (o/n) books < books

FF FF Matched Matched

Banks

(wholesale)

Risk Dealers

(risk for collateral)


P-Loans Deposits

(term)

Trading Financing

books


Matched


Reserves FF Matched

(temporary) inventory (net) (temporary)

Banks

(retail)

Money Dealers


FXS

IRS Equity

Assets

T-Bills

(term)

Trading Financing Equity

FXS

CDS … … … …

"Cash"CDS

P-Notes P-Repos (o/n) (o/n) books < books IRS

T-Notes T-Repos Reserves T-Bills Matched

inventory (net)

Risk PM

(search for yield)

Sovereign

(U.S. Treasury)

Cash PM

(search for safety)

Risk Dealers


Public Assets

(o/n) … …

Trading Financing

Matched

Reserves books < books

Central Bank

(Federal Reserve)

Money Dealers


T-Notes Currency Matched Matched




Albert Einsteinxxxx


…


Liabilities

(global) (term)

P-Notes Deposits

… …

(o/n) < (o/n)

FF FF

Banks

(wholesale)


P-Loans Deposits

(term)

Trading Financing

books


Matched


Reserves FF Matched

(temporary) inventory (net) (temporary)

Banks

(retail)

Risk Dealers


FXS

IRS Equity

Assets

T-Bills

(term)

Trading Financing Equity

FXS

CDS … … … …

"Cash"CDS

P-Notes P-Repos (o/n) (o/n) books < books IRS

T-Notes T-Repos Reserves T-Bills Matched

Risk PM

(search for yield)

Sovereign

(U.S. Treasury)

Money Dealers


Cash PM

(search for safety)

Public Assets

(o/n)

Matched

Reserves

Central Bank

(Federal Reserve)

T-Notes Currency




Albert Einsteinxxxx


…

inventory (net)

Trading Financing

books

… …

Matched

books <

Risk Dealers


Matched

FXS (temporary) inventory (net) (temporary)

FXS

IRS Equity Trading Financing Equity

CDS … … …

CDS

P-Notes P-Repos books < books IRS

T-Notes T-Repos Matched

Risk PM

(search for yield)

Money Dealers


Cash PM

(search for safety)

Matched"Cash"

121

The dealer eco-system:

Source: Mehrling et al (2013) – Bagehot Was a Shadow Banker

…

"Cash"

Financing

inventory (net)

Trading

… …

Matched

booksbooks <

Risk Dealer


Matched

Equity


IRS Equity Trading Financing

Risk PM

(search for yield)

Money Dealer


Cash PM

(search for safety)

Matched

IRS

CDS … … … FXS

CDS

P-Notes P-Repos books < books

T-Notes T-Repos Matched

122Source: Mehrling et al (2013) – Bagehot Was a Shadow Banker


Risk and cash PMs…

…

"Cash"

inventory (net)

… …

Trading Financing

books <

(temporary)

Risk Dealer


Matched Matched

books

FXS (temporary) inventory (net)


IRS

CDS … … … FXS


Risk PM

(search for yield)

Money Dealer


Cash PM

(search for safety)

T-Notes T-Repos Matched Matched CDS



Risk and cash PMs and money and risk dealers.

…

"Cash"

inventory (net)

… …

Trading Financing

books <

(temporary)

Risk Dealer


Matched Matched

books



IRS

CDS … … … FXS


Risk PM

(search for yield)

Money Dealer


Cash PM

(search for safety)





Matched book…

…

"Cash"

inventory (net)

… …

Trading Financing

books <

(temporary)

Risk Dealer


Matched Matched

books



IRS

CDS … … … FXS


Risk PM

(search for yield)

Money Dealer


Cash PM

(search for safety)





Matched book and “inventory” (net) positions.

…

"Cash"

inventory (net)

… …

Trading Financing

books <

(temporary)

Risk Dealer


Matched Matched

books



IRS

CDS … … … FXS


Risk PM

(search for yield)

Money Dealer


Cash PM

(search for safety)


126

Search for yield versus search for safety:

Risk PMs are security rich but return poor. They always search for yield.

Cash PMs are cash rich but safety poor. They primarily search for safety.


…

inventory (net)

… …

Trading Financing

books <

(temporary)

Risk Dealer


Matched Matched

books



CDS … … … FXS


Risk PM

(search for yield)

Money Dealer


Cash PM

(search for safety)

T-Notes T-Repos Matched Matched"Cash"

CDS


Natural complements:

Risk PMs repo securities out and cash in.

Cash PMs repo cash out and securities in.

…

Securities Out

Cash In

Securities In

Cash Out

inventory (net)

… …

Trading Financing

books <

(temporary)

Risk Dealer


Matched Matched

books



CDS … … … FXS


Risk PM

(search for yield)

Money Dealer


Cash PM

(search for safety)


CDS

128

The role of collateral:

Collateral gives sense of safety for cash lenders.

Cash enables risk taking via funding and shorting.


…

"Cash"

Securities Out Securities In

Cash In Cash Out

inventory (net)

… …

Trading Financing

books <

(temporary)

Risk Dealer


Matched Matched

books



IRS

CDS … … … FXS


Risk PM

(search for yield)

Money Dealer


Cash PM

(search for safety)


129

The role of collateral:

Swaps positions give rise to un-secured derivatives receivables for those in the money.

Collateral gives sense of safety for those in the money, who are de facto cash lenders.


…

Cash In Cash Out


inventory (net)

… …

Trading Financing

books <

(temporary)

Risk Dealer


Matched Matched

books


Equity

CDS … … … FXS

IRS Equity Trading Financing

IRS

Risk PM

(search for yield)

Money Dealer


Cash PM

(search for safety)


CDS


…

IRS

Risk PM

(search for yield)

Money Dealer


Cash PM

(search for safety)


CDS

DvP

TRPDvP


(temporary)


CDS … … … FXS



$1,983 $1,983 $964

-

DvP

Cash In Cash Out

GCF

(inter-dealer)

- - $1,608

$463 $463

Net- $589 --

$2,446$2,446

Reverse Repo Transactions Repo Transactions

Total

GCF

-

DvP

$3,035

$463

$3,035

$1,608

$964

Total

GCF

TRP

$463

130

Sizing the U.S. repo market:

$ trillions as of 2012Q2

Cash PMs placed over $3 trillion in cash with dealers. Of this, $2.5 trillion were lent on,

with the difference used to finance inventories. Risk PMs absorbed $2 trillion in funding.

Source: Pozsar (2014) and Copeland et al (2012)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Assets Liabilities Assets Liabilities

Q2-07 Q3-13

Secs. In [SI] RRs [SI] Secs. Borrowed [SI] Secs. Out [SO] RPs [SO] Secs. Loaned [SO] Balance

131

Money dealing using public bonds by motive:

$ trillions

Source: Haver, Federal Reserve Bank of New York

0

50

100

150

200

250

300

350

400

450

500


Q2-07 Q3-13

Secs. In [SI] RRs [SI] Secs. Borrowed [SI] Secs. Out [SO] RPs [SO] Secs. Loaned [SO] Balance

132

Money dealing using private bonds by motive:

$ trillions

Source: Haver, Federal Reserve Bank of New York


133







Macro imbalances shaping the eco-system:

Present and future macro imbalances shape the contours of the global financial

eco-system. What dealer banks do is a reflection of the eco-system they inhabit.

…

Risk PM

(search for yield)

Money Dealer


Cash PM

(search for safety)


CDS

CDS … … … FXS




… …

Risk Dealer


Matched Matched

booksbooks <

Trading Financing

inventory (net)

Imbalances

(future)

Imbalances

(present)

Macro Drivers

(global and local)

Macro Drivers

(global and local)

Cash In Cash Out




The secular rise of cash PMs has been driven by…

[1] the secular rise of managed FX regimes and FX reserves’ so-called “liquidity tranches”.

…

Cash In Cash Out


Trading Financing

inventory (net)… …

Risk Dealer


Matched Matched

booksbooks <



CDS … … … FXS

[1]


(global and local)


CDS Managed FX Regimes

Imbalances Imbalances

(future) (present)

Macro Drivers Risk PM

(search for yield)

Money Dealer


Cash PM

(search for safety)

Macro Drivers

(global and local)




[2] the secular rise of corporate profits vs. stagnant wages and capex (see Summers, 2013).

…

[2]Capital vs. Labour

Cash In Cash Out


Trading Financing


Risk Dealer


Matched Matched

booksbooks <



CDS … … … FXS

[1]


(global and local)




(future) (present)


(search for yield)

Money Dealer


Cash PM

(search for safety)

Macro Drivers

(global and local)




[3] the secular rise of a highly concentrated asset management complex (see OFR, 2013).

…

[3]Cash Pooling (AMX)

Cash In Cash Out


Trading Financing


Risk Dealer


Matched Matched

booksbooks <



CDS … … … FXS

[1]

P-Notes P-Repos books < books IRS Capital vs. Labour [2]

(global and local)




(future) (present)


(search for yield)

Money Dealer


Cash PM

(search for safety)

Macro Drivers

(global and local)



The secular rise of risk PMs has been driven by…

[4] the secular rise in underfunded pension promises (see Caballero, 2013).

…

[4] Underfunded Pensions


Cash In Cash Out


Trading Financing


Risk Dealer


Matched Matched

booksbooks <

(temporary)

Cash Pooling (AMX) [3]


CDS … … … FXS

[1]

P-Notes P-Repos books < books IRS Capital vs. Labour [2]

(global and local)




(future) (present)


(search for yield)

Money Dealer


Cash PM

(search for safety)

Macro Drivers

(global and local)




[5] the secular rise in FX reserves’ sterilization costs (see Borio et al, 2008).

…

[5]

Cash In Cash Out


Trading Financing


Risk Dealer


Matched Matched

booksbooks <


FXS Cash Pooling (AMX) [3]


CDS … … …

[1]

Sterilization Costs P-Notes P-Repos books < books IRS Capital vs. Labour [2]

[4] Underfunded Pensions T-Notes T-Repos Matched Matched"Cash"



(future) (present)


(search for yield)

Money Dealer


Cash PM

(search for safety)

Macro Drivers

(global and local) (global and local)




[6] the secular decline in yields and un-changed return expectations (see BlackRock, 2013).

…

[6]

Cash In Cash Out


Trading Financing


Risk Dealer


Matched Matched

booksbooks <



"Rosy" Expectations CDS … … … FXS Cash Pooling (AMX) [3]

[1]

[5] Sterilization Costs P-Notes P-Repos books < books IRS Capital vs. Labour [2]

[4] Underfunded Pensions T-Notes T-Repos Matched Matched"Cash"



(future) (present)


(search for yield)

Money Dealer


Cash PM

(search for safety)

Macro Drivers



Four simple goals that make the eco-system go ‘round:

[1] CIOs aim to generate enough return to fulfil their mandate to “meet liabilities”.

This is why CIOs look beyond long-only strategies and allocate to leveraged risk PMs.

…


(future) (present)


(search for yield)

Money Dealer


Cash PM

(search for safety)

Macro Drivers


Underfunded Pensions T-Notes T-Repos Matched Matched"Cash"


Sterilization Costs P-Notes P-Repos books < books IRS Capital vs. Labour

"Rosy" Expectations CDS … … … FXS Cash Pooling (AMX)



… …

Risk Dealer


Matched Matched

booksbooks <

Trading Financing

inventory (net)

CIOs

"Meet Liabilities"



[2] Risk PMs aim to generate enough return to fulfil their mandate to “beat benchmarks”.

Risk PMs get leverage from dealers, who get the cash to provide leverage from cash PMs.

…

Risk PMs

"Beat the Benchmark"

CIOs

"Meet Liabilities"

Trading Financing


Risk Dealer


Matched Matched

booksbooks <


FXS Cash Pooling (AMX)





"Rosy" Expectations CDS … … …


(future) (present)


(search for yield)

Money Dealer


Cash PM

(search for safety)

Macro Drivers




[3] Cash PMs aim to generate some return while fulfilling their mandate to “do not lose”.

Cash PMs minimize credit risk by lending against collateral and are fanned by imbalances.

…

Cash PMs

"Do Not Lose"

CIOs Risk PMs

"Meet Liabilities" "Beat the Benchmark"

Trading Financing


Risk Dealer


Matched Matched

booksbooks <







"Rosy" Expectations CDS … … …


(future) (present)


(search for yield)

Money Dealer


Cash PM

(search for safety)

Macro Drivers




[4] CEOs at both the corporate and national levels are mandated to “grow” their profits and

economies, respectively and this contributes to the skewed distribution of present incomes.

…

CEOs

"Grow"

CIOs Risk PMs Cash PMs

"Meet Liabilities" "Beat the Benchmark" "Do Not Lose"

Trading Financing


Risk Dealer


Matched Matched

booksbooks <


… … …


(future) (present)


(search for yield)

Money Dealer


Cash PM

(search for safety)

Macro Drivers

(global and local)

IRS Capital vs. Labour

(global and local)

Underfunded Pensions T-Notes T-Repos Matched


Matched"Cash"


"Rosy" Expectations CDS

Sterilization Costs P-Notes P-Repos books < books



145







Implications for macro and asset price models:

These goal-driven rigidities are not included in asset price models. Topics for future

research include the extent to which these compress the 10-year Treasury term premium.

…

CEOs

"Grow"



Trading Financing


Risk Dealer


Matched Matched

booksbooks <


… … …


(future) (present)


(search for yield)

Money Dealer


Cash PM

(search for safety)

Macro Drivers

(global and local)


(global and local)



Matched"Cash"






Implications for global macro-financial accounting:

None of these aspects of the eco-system are measured by the U.S. Flow of Funds Accounts. The

Flow of Funds accounts need a set of Flow of Collateral and Flow or Risk satellite accounts.

…

CEOs

"Grow"



Trading Financing


Risk Dealer


Matched Matched

booksbooks <


… … …


(future) (present)


(search for yield)

Money Dealer


Cash PM

(search for safety)

Macro Drivers

(global and local)


(global and local)



Matched"Cash"






Implications for governance:

…

Level IIILevel IILevel II Level I

?FSB?

Trading Financing

Level III

CIOs Risk PMs Cash PMs CEOs

"Meet Liabilities" "Beat the Benchmark" "Do Not Lose" "Grow"


Risk Dealer


Matched Matched

booksbooks <



… … … FXS Cash Pooling (AMX)


G20 G20


(search for yield)

Money Dealer


Cash PM

(search for safety)

Macro Drivers




Sterilization Costs Capital vs. Labour


149

Conclusions:

A Macro View on Shadow Banking

150

1. Bond portfolios are getting more and more leveraged andbonds are becoming more and more valuable as collateral.

2. Leveraged bond portfolios help asset-liability matchingin an ever-lower yield environment and collateral givescash pools safety in a system w/ an outdated safety net.

3. Credit, maturity and liquidity transformation is a start,but ask “why”: to manage future and present imbalances.

4. Credit transformation: bond-like volatility and equity-like returns to help CIOs meet future promises (“theme”).

5. Maturity and liquidity transformation: safe, short-termassets for the safekeeping of skewed incomes (“theme”).

6. RRPs are about more than just controlling short rates.They give shadow banks access to a reserve account at theFed, and are a first step toward “dealer of last resort”.

151

References:

152

Pozsar, Zoltan, 2014, “Shadow Banking: The Money View,” Office of

Financial Research (OFR) Working Paper(forthcoming).

Pozsar, Zoltan, 2013, “Shadow Banking and the Global Financial

Eco-System,” VoxEU.

Mehrling, Perry, Pozsar, Zoltan, Sweeney, James, Neilson, Dan, 2013,

“Bagehot Was a Shadow Banker: Shadow Banking, Central Banking and

the Future of Global Finance,” INET Working Paper.

Claessens, Stijn, Pozsar, Zoltan, Singh, Manmohan, Lev, Ratnovski 2013,

“Shadow Banking: Economics and Policy,” IMF SDN 12/12.

Pozsar, Zoltan and McCulley, Paul, 2012, “Why Banking Works One Large

Confidence Trick,” Financial Times.

Pozsar, Zoltan and Singh, Manmohan, 2011, “The Nonbank-Bank Nexus and

the Shadow Banking System,” IMF WP 11/289.

Pozsar, Zoltan, 2011, “Institutional Cash Pools and the Triffin Dilemma

of the U.S. Banking System,” IMF WP 11/190.

153

Data Appendix:

0

2,000

4,000

6,000

8,000

10,000

12,000


Q2-07 Q3-13

Loans PRBs PUBs RRs FF lent Reserves Balance DDs SDs LDs RPs GDF FF borrowed

[1]

[2]

[3]

[1]

[2]

[3]

U.S. Chartered Banks:

$ billions

Source: Haver, Federal Reserve Z.1, H.8 and author’s calculations 154

0

500

1,000

1,500

2,000

2,500


Q2-07 Q3-13

Loans PRBs PUBs RRs FF lent Reserves Balance DDs SDs LDs RPs FF borrowed GDF

[1]

[2]

[3]

[4]

[1]

[2]

[3]

[4]

New York Branches of Foreign Banks:

$ billions

Source: Haver, Federal Reserve Z.1, H.8 and author’s calculations 155

0

500

1,000

1,500

2,000

2,500

3,000

Assets Liabilities

Q3-13

RR [o/n] SB [o/n] RR [< 30] SB [< 30] RR [30+] SB [30+] RP [o/n]

SL [o/n] RP [< 30] SL [< 30] RP [30+] SL [30+] Net financing

[1]

[2]

[3]

[4]

Securities In Securities Out

Cash Out Cash In

Dealer Banks’ “Government” Trading Desks:

$ billions

Source: Haver, New York Fed (FR 2004) and author’s calculations 156

0

50

100

150

200

250

Assets Liabilities

Q3-13

RR [o/n] SB [o/n] RR [term] SB [term] RP [o/n] SL [o/n] RP [term] SL [term] Net financing

[3]

[2]

[1]

Cash Out Cash In

Securities In Securities Out

Dealer Banks’ “Credit” Trading Desks:

$ billions

Source: Haver, New York Fed (FR 2004) and author’s calculations 157

0

100

200

300

400

500

600

700

800

900

1,000


2007 January 2014

Repos T-Bills T-Notes w/ RM < 1 Yr. GSEs Other CNAV [o/n]

[1]

[2]

[1]

[2]

Government-Only Money Funds:

$ billions

Source: Haver, SEC and author’s calculations 158

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000


2007 January 2014

Repos [o/n] T-Bills T-Notes w/ RM < 1 Yr. GSEs LTDs CP Other CNAV [o/n]

[1]

[2]

[3]

[4] [4]

[3]

[2]

[1]

Prime Money Funds:

$ billions

Source: Haver, SEC and author’s calculations 159

0

50

100

150

200

250

300

350


Q2-07 Q3-13

Balance Agency RMBS Repos

Mortgage REITs:

$ billions

Source: Haver, Federal Reserve Z.1 160

0

1

2

3

4

5

6

7

8

9

10


Q2-07 Q3-13

Balance U.S. dollar assets U.S. dollar liabilities

Offshore Dollar Banking:

$ trillions

Source: BIS 161

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