How the Financial System Works - A Map of Money Flows in the Global Financial Ecosystem -
by Zoltan Pozsar
Senior Adviser Office of Financial Research, U.S. Treasury
An Appendix to the paper “Shadow Banking: The Money View” (Pozsar, 2014)
1
1. The Hierarchy of Money. 2. The Hierarchy of Access. 3. The Hierarchy of Uses..
4. The Dealer Eco-System. 5. The Macro Perspective. 6. Policy Implications... 2
Four core institutions:
Central Bank (Federal Reserve)
Central bank,…
Source: Pozsar (2014)
3
Four core institutions:
Central Bank (Federal Reserve)
Central bank, banks (small and big),…
Banks (retail)
Banks (wholesale)
Source: Pozsar (2014)
4
Four core institutions:
Central Bank (Federal Reserve)
Dealer Banks
Banks (retail)
Dealer Banks
Central bank, banks (small and big), dealers,…
Banks (wholesale)
Source: Pozsar (2014)
5
Four core institutions:
Central Bank (Federal Reserve)
Dealer Banks
Central bank, banks (small and big), dealers and money funds.
Money Funds
Source: Pozsar (2014)
Banks (retail)
Dealer Banks
Banks (wholesale)
Money Funds
6
Four core money claims: Currency,…
Central Bank (Federal Reserve)
Dealer Banks
Currency
Money Funds
Source: Pozsar (2014)
Banks (retail)
Dealer Banks
Banks (wholesale)
Money Funds
7 Liabilities
Four core money claims: Currency, deposits,…
Central Bank (Federal Reserve)
Dealer Banks
Currency
Money Funds
Banks (retail)
Dealer Banks
Deposits (o/n)
Banks (wholesale)
Money Funds
Deposits (o/n)
Source: Pozsar (2014)
8 Liabilities
Four core money claims: Currency, deposits, repos,…
Central Bank (Federal Reserve)
Dealer Banks
Currency
Repos (o/n)
Money Funds
Banks (retail)
Dealer Banks
Deposits (o/n)
Banks (wholesale)
Repos (o/n)
Money Funds
Deposits (o/n)
Source: Pozsar (2014)
9 Liabilities
Four core money claims: Currency, deposits, repos and constant NAV shares.
Central Bank (Federal Reserve)
Dealer Banks
Currency
Repos (o/n)
Money Funds CNAVs (o/n)
Banks (retail)
Dealer Banks
Deposits (o/n)
Banks (wholesale)
Money Funds
Deposits (o/n)
Source: Pozsar (2014)
Repos (o/n)
CNAVs (o/n)
10 Liabilities
Two categories of assets:
Central Bank (Federal Reserve)
Public assets:
Dealer Banks
Currency Public Assets
T-Bills – Treasury bills T-Notes – Treasury notes
Repos (o/n)
Money Funds
Assets
CNAVs (o/n)
Banks (retail)
Private assets: Private Assets
P-Bills - CD, CP, ECP, etc. P-Notes - bonds, RMBS, ABS
Source: Pozsar (2014)
Dealer Banks
Deposits (o/n)
Banks (wholesale)
Repos (o/n)
Money Funds
Deposits (o/n)
CNAVs (o/n)
11 Liabilities
Two categories of assets:
Central Bank (Federal Reserve)
Public assets:
T-Notes
Currency
Public Assets
T-Bills – Treasury bills T-Notes – Treasury notes
Dealer Banks Repos (o/n)
Money Funds
Assets
CNAVs (o/n)
Banks (retail)
Private assets: Private Assets
P-Bills - CD, CP, ECP, etc. P-Notes - bonds, RMBS, ABS
Source: Pozsar (2014)
Dealer Banks
Deposits (o/n)
Banks (wholesale)
Repos (o/n)
Money Funds
Deposits (o/n)
CNAVs (o/n)
12 Liabilities
Two categories of assets:
Central Bank (Federal Reserve)
Public assets:
Currency
T-Bills …
T-Notes
Dealer Banks (government desk)
Public Assets
T-Bills – Treasury bills T-Notes – Treasury notes T-Repos – Treasury repos
T-Repos (o/n)
T-Notes
Money Funds
Assets
CNAVs (o/n)
Banks (retail)
Private assets: Private Assets
P-Bills - CD, CP, ECP, etc. P-Notes - bonds, RMBS, ABS
Source: Pozsar (2014)
Dealer Banks
Deposits (o/n)
Banks (wholesale)
Repos (o/n)
Money Funds
Deposits (o/n)
CNAVs (o/n)
13 Liabilities
Two categories of assets:
Central Bank (Federal Reserve)
Public assets: Public Assets
T-Bills – Treasury bills T-Notes – Treasury notes T-Repos – Treasury repos T-CNAVs – Treasury CNAVs
T-Bills
Money Funds (government-only)
Assets
Banks (retail)
Private Assets
P-Bills - CD, CP, ECP, etc. P-Notes - bonds, RMBS, ABS
T-Repos (o/n)
T-Notes
T-Bills
Private assets:
Source: Pozsar (2014)
Currency
…
T-Notes
Dealer Banks (government desk)
T-CNAVs (o/n)
Dealer Banks
Deposits (o/n)
Banks (wholesale)
Repos (o/n)
Money Funds
Deposits (o/n)
CNAVs (o/n)
14 Liabilities
Two categories of assets:
Central Bank (Federal Reserve)
Public assets: Public Assets
T-Bills – Treasury bills T-Notes – Treasury notes T-Repos – Treasury repos T-CNAVs – Treasury CNAVs
T-Bills
Money Funds (government-only)
Assets
Banks (retail)
Private Assets
P-Bills - CD, CP, ECP, etc. P-Notes - bonds, RMBS, ABS
T-Repos (o/n)
T-Notes
T-Bills
Private assets:
Source: Pozsar (2014)
Currency
…
T-Notes
Dealer Banks (government desk)
P-Loans
T-CNAVs (o/n)
Dealer Banks
Deposits (o/n)
Banks (wholesale)
Repos (o/n)
Money Funds
Deposits (o/n)
CNAVs (o/n)
15 Liabilities
Two categories of assets:
Central Bank (Federal Reserve)
Public assets:
Currency
T-Bills …
T-Notes
Dealer Banks (government desk)
Public Assets
T-Bills – Treasury bills T-Notes – Treasury notes T-Repos – Treasury repos T-CNAVs – Treasury CNAVs
T-Notes
Money Funds (government-only)
Assets
T-Bills
Banks (retail)
Private assets:
P-Loans
P-Notes
T-CNAVs (o/n)
Dealer Banks
Deposits (o/n)
Banks (wholesale)
…
Private Assets
P-Bills - CD, CP, ECP, etc. P-Notes - bonds, RMBS, ABS
T-Repos (o/n)
Repos (o/n)
Money Funds
Deposits (o/n)
CNAVs (o/n)
P-Loans
Source: Pozsar (2014)
16 Liabilities
Two categories of assets:
Central Bank (Federal Reserve)
Public assets: Public Assets
T-Bills – Treasury bills T-Notes – Treasury notes T-Repos – Treasury repos T-CNAVs – Treasury CNAVs
T-Bills
Money Funds (government-only)
Banks (retail) Deposits (o/n)
P-Bills
P-Repos (o/n)
P-Notes
Banks (wholesale) P-Notes …
Private Assets
P-Loans
T-CNAVs (o/n)
Dealer Banks (credit desk)
…
Assets
T-Bills
P-Bills - CD, CP, ECP, etc. P-Notes - bonds, RMBS, ABS
T-Repos (o/n)
T-Notes
Private assets:
P-Repos – private repos
Currency
…
T-Notes
Dealer Banks (government desk)
Money Funds
Deposits (o/n)
CNAVs (o/n)
P-Loans
Source: Pozsar (2014)
17 Liabilities
Two categories of assets:
Central Bank (Federal Reserve)
Public assets: Public Assets
T-Bills – Treasury bills T-Notes – Treasury notes T-Repos – Treasury repos T-CNAVs – Treasury CNAVs
T-Bills
Money Funds (government-only)
Banks (retail) Deposits (o/n)
P-Bills
P-Repos (o/n)
P-Notes
Banks (wholesale) P-Notes …
Private Assets
P-Loans
T-CNAVs (o/n)
Dealer Banks (credit desk)
…
Assets
T-Bills
P-Bills - CD, CP, ECP, etc. P-Notes - bonds, RMBS, ABS
T-Repos (o/n)
T-Notes
Private assets:
P-Repos – private repos P-CNAVs – private CNAVs
Currency
…
T-Notes
Dealer Banks (government desk)
Money Funds (prime)
Deposits (o/n)
P-Bills
P-CNAVs (o/n)
P-Loans
Source: Pozsar (2014)
18 Liabilities
Currency
T-Repos (o/n)
T-Notes
Money Funds (government-only)
Assets
T-Bills
Banks (retail) P-Loans
T-CNAVs (o/n)
Dealer Banks (credit desk)
Deposits (o/n)
P-Bills
P-Repos (o/n)
P-Notes
Banks (wholesale) P-Notes …
Private Assets
T-Bills …
T-Notes
Dealer Banks (government desk)
Public Assets
Banks form the backbone of the payments system and facilitate the net payments (via deposits) of all entities that are lower in the system-hierarchy, including dealers and money funds.
Central Bank (Federal Reserve)
…
Deposits’ special function:
Money Funds (prime)
Deposits (o/n)
P-Bills
P-CNAVs (o/n)
P-Loans
Source: Pozsar (2014)
19 Liabilities
Central Bank (Federal Reserve) Currency
Money Funds (government-only)
Assets
T-Bills
Banks (retail) P-Loans
T-CNAVs (o/n)
Dealer Banks (credit desk)
Deposits (o/n)
P-Bills
P-Repos (o/n)
P-Notes
Banks (wholesale) P-Notes …
Private Assets
T-Repos (o/n)
T-Notes
For every institution, money is something different. This is the intra-system hierarchy of money…
T-Bills …
T-Notes
Public Assets
What happens with net payment surpluses at the end of the day? Through what instruments are money balances stored within the system?
Dealer Banks (government desk)
…
Storing payment surpluses:
Money Funds (prime)
Deposits (o/n)
P-Bills
P-CNAVs (o/n)
P-Loans
Source: Pozsar (2014)
20 Liabilities
Reserves at the Fed are money for banks.
Central Bank (Federal Reserve)
Public Assets
T-Notes
Dealer Banks (government desk)
Currency Reserves (o/n)
T-Bills …
Intra-system money hierarchy:
T-Notes
Money Funds (government-only)
Banks (retail) Deposits (o/n)
P-Bills
P-Repos (o/n)
…
Reserves (o/n)
T-CNAVs (o/n)
Dealer Banks (credit desk)
…
Assets
T-Bills
P-Loans
P-Notes
Banks (wholesale) Reserves (o/n)
Money Funds (prime)
Deposits (o/n)
P-Bills
P-CNAVs (o/n)
…
Private Assets
T-Repos (o/n)
P-Loans
Source: Pozsar (2014)
21 Liabilities
T-Notes
Public Assets
o/n T-Repos with wholesale banks are money for dealers.
Central Bank (Federal Reserve)
Dealer Banks (government desk)
Currency Reserves (o/n)
T-Repos (o/n) T-Notes
Money Funds (government-only)
Banks (retail)
P-Bills
P-Repos (o/n)
…
Deposits (o/n)
P-Loans
P-Notes
Banks (wholesale) T-Repos (o/n)
P-Bills
…
Reserves (o/n)
Money Funds (prime)
…
Private Assets
Reserves (o/n)
T-CNAVs (o/n)
Dealer Banks (credit desk)
…
Assets
T-Bills
Source: Pozsar (2014)
T-Repos (o/n)
…
Intra-system money hierarchy:
P-Loans
Deposits (o/n)
P-CNAVs (o/n)
22 Liabilities
o/n T-Repos w/ dealers are money for government MFs.
Central Bank (Federal Reserve)
Public Assets
T-Notes
Dealer Banks (government desk)
Currency Reserves (o/n)
T-Repos (o/n)
T-Repos (o/n)
…
Intra-system money hierarchy:
T-Notes
Money Funds (government-only) T-CNAVs (o/n)
…
T-Repos (o/n)
Banks (retail)
Source: Pozsar (2014)
P-Bills
P-Repos (o/n)
…
Deposits (o/n)
P-Loans
P-Notes
Banks (wholesale) T-Repos (o/n)
P-Bills
…
Reserves (o/n)
Money Funds (prime)
…
Private Assets
Reserves (o/n)
Dealer Banks (credit desk)
…
Assets
T-Bills
P-Loans
Deposits (o/n)
P-CNAVs (o/n)
23 Liabilities
o/n P-Repos with dealers are money for prime MFs.
Central Bank (Federal Reserve)
Public Assets
T-Notes
Dealer Banks (government desk)
Currency Reserves (o/n)
T-Repos (o/n)
T-Repos (o/n)
…
Intra-system money hierarchy:
T-Notes
Money Funds (government-only) T-CNAVs (o/n)
…
T-Repos (o/n)
Assets
T-Bills
Banks (retail)
Source: Pozsar (2014)
…
P-Repos (o/n)
…
Deposits (o/n)
P-Loans
P-Notes
Banks (wholesale)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n)
P-Repos (o/n)
Money Funds (prime)
…
Private Assets
Reserves (o/n)
Dealer Banks (credit desk)
P-Loans
Deposits (o/n)
P-Bills
P-CNAVs (o/n)
24 Liabilities
Public Assets
T-Notes
Currency Reserves (o/n)
T-Repos (o/n)
Money Funds (government-only)
Assets
?
T-Bills
Dealer Banks (credit desk)
…
P-Repos (o/n)
…
Deposits (o/n)
P-Loans
P-Notes
Banks (wholesale)
P-Repos (o/n)
Money Funds (prime)
…
P-Repos (o/n)
…
T-Repos (o/n)
…
Reserves (o/n)
T-CNAVs (o/n)
…
T-Repos (o/n)
Banks (retail)
Private Assets
T-Repos (o/n) T-Notes
Reserves (o/n)
Source: Pozsar (2014)
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
P-Loans
Deposits (o/n)
P-Bills
P-CNAVs (o/n)
25 Liabilities
Central Bank (Federal Reserve) T-Notes
Currency Reserves (o/n)
T-Repos (o/n)
T-Repos (o/n)
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
Money Funds (government-only)
T-Bills (o/n)
T-Repos (o/n)
T-CNAVs (o/n)
…
We do not typically think of her as a bank, but the sovereign is also capable of absorbing money demand.
Public Assets
Without the sovereign the money matrix is incomplete.
Dealer Banks (government desk)
…
The sovereign as a “bank”:
Assets
T-Bills
Banks (retail)
Source: Pozsar (2014)
…
P-Repos (o/n)
…
Deposits (o/n)
P-Loans
P-Notes
Banks (wholesale)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n)
P-Repos (o/n)
Money Funds (prime)
…
Private Assets
Reserves (o/n)
Dealer Banks (credit desk)
P-Loans
Deposits (o/n)
P-Bills
P-CNAVs (o/n)
26 Liabilities
Sovereign (U.S. Treasury) Reserves (o/n)
Assets
Breakable and negotiable claims that do not trade at par in real time (puts prior to maturity subject to penalty, market risks).
…
T-Repos (o/n)
T-Notes
T-Repos (term)
T-Bills (o/n)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
T-CNAVs (o/n)
Dealer Banks (credit desk)
…
…
P-Repos (o/n)
…
P-Repos (o/n)
…
Deposits (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (wholesale)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n)
Money Funds (prime)
…
Private Assets
T-Repos (o/n)
Money Funds (government-only)
Banks (retail) Reserves (o/n)
Source: Pozsar (2014)
Currency Reserves (o/n)
…
Par at maturity in the near term (o/n < 1 yr).
Public Assets
T-Notes
Dealer Banks (government desk)
…
Par at maturity versus par on demand claims.
Central Bank (Federal Reserve)
…
What are money-like claims?
P-Loans
Deposits (term)
P-Bills (term)
P-CNAVs (o/n)
27 Liabilities
T-Notes
Currency Reserves (o/n)
Sovereign (U.S. Treasury) T-Bills (o/n)
T-Repos (term)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
Banks (retail)
<
T-CNAVs (o/n)
Dealer Banks (credit desk)
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (wholesale)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (prime)
…
Private Assets
T-Repos (o/n)
Money Funds (government-only)
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
<
T-Notes
…
Assets
Reserves (o/n)
T-Repos (o/n)
…
Public Assets
Take more [o/n liquidity], give less [o/n liquidity] and put the rest in term…
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
The alchemy of banking:
P-Loans
Deposits (term)
P-Bills (term)
<
P-CNAVs (o/n)
28 Liabilities
<
T-Repos (o/n)
T-Notes
T-Repos (term)
Money Funds (government-only)
T-Bills (o/n)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
Banks (retail)
<
T-CNAVs (o/n)
Dealer Banks (credit desk)
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
…
Reserves Deposits (o/n) < (o/n) P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (wholesale)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (prime)
…
Private Assets
T-Repos (o/n)
…
Reserves (o/n)
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.
Source: Pozsar (2014)
Sovereign (U.S. Treasury)
Assets
Different institutions have different sets of backups for survival if o/n liquidity runs out.
Currency Reserves (o/n)
…
…this exposes “banks” to rollover risks, and if there is a run you ask: “do I have enough [o/n] liquidity to survive?”.
T-Notes Public Assets
Take more [o/n liquidity], give less [o/n liquidity] and put the rest in term…
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
The alchemy of banking:
P-Loans
Deposits (term)
P-Bills (term)
<
P-CNAVs (o/n)
29 Liabilities
Reserves (o/n)
Assets
In a panic, this will likely spiral into a fire sale.
Sovereign (U.S. Treasury) T-Bills (o/n)
T-Repos (o/n)
T-Notes
T-Repos (term)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
Banks (retail)
<
T-CNAVs (o/n)
Dealer Banks (credit desk)
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (wholesale)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (funding/market)
…
Private Assets
<
Money Funds (funding/market)
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
T-Repos (o/n)
…
If this option is exhausted money funds must sell.
Currency Reserves (o/n)
…
Public Assets
T-Notes
Dealer Banks (government desk)
…
Money funds can borrow only limited amounts.
Central Bank (Federal Reserve)
…
Hierarchy of liquidity puts:
P-Loans
Deposits (term)
P-Bills (term)
<
P-CNAVs (o/n)
30 Liabilities
Sovereign (U.S. Treasury) Reserves (o/n)
Assets
In a panic, this will likely spiral into a fire sale too.
T-Bills (o/n)
T-Repos (o/n)
T-Notes
T-Repos (term)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
Banks (retail)
<
T-CNAVs (o/n)
Dealer Banks (funding/market)
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (wholesale)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (funding/market)
…
Private Assets
<
Money Funds (funding/market)
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
T-Repos (o/n)
…
Currency Reserves (o/n)
…
If this option is exhausted dealers must sell too.
T-Notes
Dealer Banks (funding/market)
…
Public Assets
Dealers have more room to borrow against their assets.
Central Bank (Federal Reserve)
…
Hierarchy of liquidity puts:
P-Loans
Deposits (term)
P-Bills (term)
<
P-CNAVs (o/n)
31 Liabilities
Funding and market liquidity are private liquidity puts.
Reserves (o/n)
T-Bills (o/n)
…
T-Repos (o/n)
T-Notes
T-Repos (term)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
Banks (retail)
<
T-CNAVs (o/n)
Dealer Banks (funding/market)
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (wholesale)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (funding/market)
…
Private Assets
<
Money Funds (funding/market)
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
T-Repos (o/n) …
Currency Reserves (o/n)
Sovereign (U.S. Treasury)
Assets
They both depend on private market participants (banks and dealers) for execution.
T-Notes
Dealer Banks (funding/market)
…
Public Assets
Borrowing against assets and selling assets is access to funding and market liquidity.
Central Bank (Federal Reserve)
…
Hierarchy of liquidity puts:
P-Loans
Deposits (term)
P-Bills (term)
<
P-CNAVs (o/n)
Private Liquidity Puts Liabilities
32
T-Bills (o/n)
…
T-Repos (o/n)
T-Notes
T-Repos (term)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
Banks (funding/LoLR)
<
T-CNAVs (o/n)
Dealer Banks (funding/market)
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (funding/LoLR)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (funding/market)
…
Private Assets
<
Money Funds (funding/market)
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
T-Repos (o/n) …
Currency Reserves (o/n)
Sovereign (U.S. Treasury) Reserves (o/n)
Assets
This is access to funding as well as lender of last resort (LoLR) liquidity.
T-Notes
Dealer Banks (funding/market)
…
Retail and wholesale banks hardly ever have to sell.
Public Assets
Retail and wholesale banks can borrow against assets or put them to the central bank.
Central Bank (Federal Reserve)
…
Hierarchy of liquidity puts:
P-Loans
Deposits (term)
P-Bills (term)
<
P-CNAVs (o/n)
Private Liquidity Puts Liabilities
33
Sovereign (monetary backtop) Reserves (o/n)
Assets
T-Bills (o/n)
T-Repos (o/n)
T-Notes
T-Repos (term)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
Banks (funding/LoLR)
<
T-CNAVs (o/n)
Dealer Banks (funding/market)
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (funding/LoLR)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (funding/market)
…
Private Assets
<
Money Funds (funding/market)
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
T-Repos (o/n)
…
Currency Reserves (o/n)
…
T-Notes
Dealer Banks (funding/market)
…
Public Assets
The sovereign has a monetary backstop (usually a taboo; often used during WWI & II and recently the OMT, see McCulley and Pozsar, 2012).
Central Bank (Federal Reserve)
…
Hierarchy of liquidity puts:
P-Loans
Deposits (term)
P-Bills (term)
<
P-CNAVs (o/n)
Private Liquidity Puts Liabilities
34
Sovereign (monetary backtop) Reserves (o/n)
Assets
T-Bills (o/n)
Money Funds (funding/market) T-Repos (o/n)
<
T-CNAVs (o/n)
Dealer Banks (funding/market)
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (funding/LoLR)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (funding/market)
…
Private Assets
T-Repos (o/n) T-Repos (term)
T-Bills (term)
Banks (funding/LoLR)
<
T-Notes
T-Bills (term)
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
T-Repos (o/n)
…
Currency Reserves (o/n)
…
T-Notes
Dealer Banks (funding/market)
…
Public Assets
LoLR and monetary backstops are public liquidity puts.
Central Bank (Federal Reserve)
…
Hierarchy of liquidity puts:
P-Loans
Deposits (term)
P-Bills (term)
<
P-CNAVs (o/n)
Public Liquidity Puts Private Liquidity Puts Liabilities
35
Source: Pozsar (2014)
Sovereign (monetary backtop) Reserves (o/n)
T-Bills (o/n)
T-Repos (o/n)
T-Notes
T-Repos (term)
Money Funds (funding/market) T-Repos (o/n)
T-Bills (term)
T-Bills (term)
<
T-CNAVs (o/n)
Dealer Banks (funding/market)
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
…
Reserves Deposits (o/n) < (o/n)
<
…
T-Repos (o/n) …
Currency Reserves (o/n)
Banks (funding/LoLR)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (funding/LoLR)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (funding/market)
…
Private Assets
If capital is short the hierarchy of credit puts overrides the hierarchy of liquidity puts.
Assets
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.
T-Notes
Dealer Banks (funding/market)
…
Public Assets
LoLR and monetary backstops are public liquidity puts.
Central Bank (Federal Reserve)
…
Hierarchy of liquidity puts:
P-Loans
Deposits (term)
P-Bills (term)
<
P-CNAVs (o/n)
Public Liquidity Puts Private Liquidity Puts Liabilities
36
Central Bank (Federal Reserve)
Sovereign (guaranteed)
Assets
Reserves (o/n)
T-Bills (o/n)
T-Repos (o/n)
T-Notes
T-Repos (term)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
<
T-CNAVs (o/n)
Dealer Banks
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
…
Reserves Deposits (o/n) < (o/n) P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds
…
Private Assets
<
Money Funds
Banks
Source: Pozsar (2014)
T-Repos (o/n)
…
Currency Reserves (o/n)
…
Public Assets
T-Notes
…
T-Bills are guaranteed.
Dealer Banks
…
Hierarchy of credit puts:
P-Loans
Deposits (term)
P-Bills (term)
<
P-CNAVs (o/n)
37 Liabilities
Central Bank (Federal Reserve)
Sovereign (guaranteed)
Assets
Reserves (o/n)
T-Bills (o/n)
T-Repos (o/n)
T-Notes
T-Repos (term)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
Banks (insured)
<
T-CNAVs (o/n)
Dealer Banks
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds
…
Private Assets
<
Money Funds
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
T-Repos (o/n)
…
Currency Reserves (o/n)
…
Public Assets
T-Notes
…
Deposits are government insured up to $250,000.
Dealer Banks
…
Hierarchy of credit puts:
P-Loans
Deposits (term)
P-Bills (term)
<
P-CNAVs (o/n)
38 Liabilities
Central Bank (Federal Reserve)
Sovereign (guaranteed)
Assets
Reserves (o/n)
T-Bills (o/n)
T-Repos (o/n)
T-Notes
T-Repos (term)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
Banks (insured)
<
T-CNAVs (o/n)
Dealer Banks
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds
…
Private Assets
<
Money Funds
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
T-Repos (o/n)
…
Currency Reserves (o/n)
…
Public Assets
T-Notes
…
Guarantees and insurance are public credit puts.
Dealer Banks
…
Hierarchy of credit puts:
P-Loans
Deposits (term)
P-Bills (term)
<
P-CNAVs (o/n)
39
Public Credit Puts Liabilities
Currency Reserves (o/n)
Sovereign (guaranteed)
Assets
Reserves (o/n)
T-Bills (o/n)
T-Repos (o/n)
T-Notes
T-Repos (term)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
Banks (insured)
<
T-CNAVs (o/n)
Dealer Banks (secured)
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds
…
Private Assets
<
Money Funds
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
T-Repos (o/n)
…
Public Assets
T-Notes
…
Repos are secured claims.
Dealer Banks (secured)
…
Central Bank (Federal Reserve)
…
Hierarchy of credit puts:
P-Loans
Deposits (term)
P-Bills (term)
<
P-CNAVs (o/n)
40
Public Credit Puts Liabilities
Central Bank (Federal Reserve) Currency Reserves (o/n)
Sovereign (guaranteed) T-Bills (o/n)
T-Repos (term)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
Banks (insured)
<
T-CNAVs (o/n)
Dealer Banks (secured)
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Money Funds (secured/diversified)
Banks
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) < …
Private Assets
T-Repos (o/n)
Money Funds (secured/guaranteed)
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
<
T-Notes
…
Assets
Reserves (o/n)
T-Repos (o/n)
…
T-Notes
…
Public Assets
Money fund shares are backed either by secured and guaranteed assets, or secured and diversified assets. They may also have reputational puts to their sponsor (weak puts).
Dealer Banks (secured)
…
Hierarchy of credit puts:
P-Loans
Deposits (term)
P-Bills (term)
<
P-CNAVs (o/n)
41
Public Credit Puts Liabilities
T-Notes
Currency Reserves (o/n)
Sovereign (guaranteed) T-Bills (o/n)
T-Repos (term)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
Banks (insured)
<
T-CNAVs (o/n)
Dealer Banks (secured)
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Money Funds (secured/diversified)
Banks
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) < …
Private Assets
T-Repos (o/n)
Money Funds (secured/guaranteed)
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
<
T-Notes
…
Assets
Reserves (o/n)
T-Repos (o/n)
…
Public Assets
Collateral, diversification and reputational puts are all private credit puts.
Dealer Banks (secured)
…
Central Bank (Federal Reserve)
…
Hierarchy of credit puts:
P-Loans
Deposits (term)
P-Bills (term)
Public Credit Puts
<
P-CNAVs (o/n)
Private Credit Puts Liabilities
42
T-Notes
Currency Reserves (o/n)
Sovereign (guaranteed) T-Bills (o/n)
T-Repos (term)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
Banks (insured)
<
T-CNAVs (o/n)
Dealer Banks (secured)
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (un-insured)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (secured/diversified)
…
Private Assets
T-Repos (o/n)
Money Funds (secured/guaranteed)
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
<
T-Notes
…
Assets
Reserves (o/n)
T-Repos (o/n)
…
Public Assets
Un-insured deposits are unsecured and un-diversified.
Dealer Banks (secured)
…
Central Bank (Federal Reserve)
…
Hierarchy of credit puts:
P-Loans
Deposits (term)
P-Bills (term)
Public Credit Puts
<
P-CNAVs (o/n)
Private Credit Puts Liabilities
43
The hierarchy of money:
[1] Purely public money:
Currency Reserves
Sovereign (U.S. Treasury) Reserves (o/n)
T-Repos (o/n)
<
T-Repos (o/n)
T-Notes
T-Repos (term)
Money Funds (government-only)
T-Bills
T-Repos (o/n)
Purely public
T-Bills (term)
<
Ability to tax and money creation at will
[2] Private-public money:
Explicit liquidity puts from the Fed, and explicit credit puts from the sovereign (i.e. the FDIC) on all deposits < $250K.
T-CNAVs (o/n)
Source: Pozsar (2014)
Dealer Banks (credit desk)
Banks (wholesale)
<
[3] Public-private money:
Implicit official liquidity and credit puts via Treasury collateral involved, but no direct puts on the liability side.
P-Repos (o/n)
P-Notes
P-Repos (term)
[4] Purely private money:
No official puts, not even implicitly via the collateral involved. Peripheral money
Money Funds (prime) P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
P-Repos (o/n)
…
…
Reserves Deposits (o/n) < Private P-Loans public
…
Private Assets
Banks (retail)
Public private
…
Assets
…
Purely public, hybrid and purely private money claims.
T-Notes
…
Public Assets
The types of assets and the types of backstops behind money claims yield four basic categories of money.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
P-Loans
Deposits (term)
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n) Pur ely private
Private Backstops Liabilities
44
The hierarchy of money:
[1] Public money:
Currency Reserves
Sovereign (U.S. Treasury) Reserves (o/n)
T-Repos (o/n)
<
T-Repos (o/n)
T-Notes
T-Repos (term)
Money Funds (government-only)
T-Bills
T-Repos (o/n)
Public money
T-Bills (term)
<
Ability to tax and money creation at will
[2] Insured money:
Explicit liquidity puts from the Fed, and explicit credit puts from the sovereign (i.e. the FDIC) on all deposits < $250K.
T-CNAVs (o/n)
Source: Pozsar (2014)
Dealer Banks (credit desk)
Banks (wholesale)
<
[3] Public shadow money:
Implicit official liquidity and credit puts via Treasury collateral involved, but no direct puts on the liability side.
P-Repos (o/n)
P-Notes
P-Repos (term)
[4] Private shadow money:
No official puts, not even implicitly via the collateral involved. Peripheral money
Money Funds (prime) P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
P-Repos (o/n)
…
…
Reserves Deposits (o/n) < Insured P-Loans money
…
Private Assets
Banks (retail)
Public shadow
…
Assets
…
Purely public, hybrid and purely private money claims.
T-Notes
…
Public Assets
The types of assets and the types of backstops behind money claims yield four basic categories of money.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
P-Loans
Deposits (term)
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n) Private sha dow
Private Backstops Liabilities
45
The hierarchy of money:
[1] Public money (M0, or base money):
M0
Sovereign (U.S. Treasury) Reserves (o/n)
T-Repos (o/n)
<
T-Repos (o/n)
T-Notes
T-Repos (term)
Money Funds (government-only)
T-Bills
T-Repos (o/n)
Public money
T-Bills (term)
<
[2] Insured money (M1 and M2):
Explicit liquidity puts from the Fed, and explicit credit puts from the sovereign (i.e. the FDIC) on all deposits < $250K.
T-CNAVs (o/n)
Dealer Banks (credit desk) P-Repos (o/n) M1 M2
Banks (wholesale)
P-Notes
P-Repos (term)
Implicit official liquidity and credit puts via Treasury collateral involved, but no direct puts on the liability side.
[4] Private shadow money:
No official puts, not even implicitly via the collateral involved. Peripheral money
Money Funds (prime) P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
<
[3] Public shadow money:
P-Repos (o/n) …
…
Reserves Deposits (o/n) < Insured P-Loans money
…
Private Assets
Banks (retail)
Public shadow
…
Assets
Traditional money supply…
Source: Pozsar (2014)
Currency Reserves
Ability to tax and money creation at will
…
Purely public, hybrid and purely private money claims.
T-Notes
…
Public Assets
The types of assets and the types of backstops behind money claims yield four basic categories of money.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
P-Loans
Deposits (term)
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n) Private sha dow
Private Backstops Liabilities
46
The hierarchy of money:
[1] Public money (M0, or base money):
Reserves (o/n)
T-Repos (o/n)
<
T-Repos (o/n)
T-Notes
T-Repos (term)
[2] Insured money (M1 and M2):
Explicit liquidity puts from the Fed, and explicit credit puts from the sovereign (i.e. the FDIC) on all deposits < $250K.
Money Funds (government-only)
T-Bills
T-Repos (o/n)
Public money
T-Bills (term)
Banks (retail)
<
T-CNAVs (o/n) M3
M1 M2
Banks (wholesale)
<
[3] Public shadow money (M3):
Implicit official liquidity and credit puts via Treasury collateral involved, but no direct puts on the liability side.
P-Repos (o/n) …
P-Repos (o/n) …
…
Reserves Deposits (o/n) < Insured P-Loans money
P-Notes
P-Repos (term)
[4] Private shadow money (M3):
No official puts, not even implicitly via the collateral involved. Peripheral money
Money Funds (prime)
T-Repos (o/n)
P-Repos (o/n) …
M3
…
Reserves (o/n) <
Public shadow
Dealer Banks (credit desk)
…
Private Assets
Source: Pozsar (2014)
M0
Sovereign (U.S. Treasury)
Assets
Traditional money supply vs. shadow money supply.
Currency Reserves
Ability to tax and money creation at will
…
Purely public, hybrid and purely private money claims.
T-Notes
…
Public Assets
The types of assets and the types of backstops behind money claims yield four basic categories of money.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
P-Loans
Deposits (term)
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n) Private sha dow
Private Backstops Liabilities
M3
47
The hierarchy of money:
[1] Public money (M0, or base money):
Reserves (o/n)
T-Repos (o/n)
<
T-Repos (o/n)
T-Notes
T-Repos (term)
[2] Insured money (M1 and M2):
Explicit liquidity puts from the Fed, and explicit credit puts from the sovereign (i.e. the FDIC) on all deposits < $250K.
Money Funds (government-only)
T-Bills
T-Repos (o/n)
Public money
T-Bills (term)
<
T-CNAVs (o/n)
P-Repos (o/n) M1 M2
Banks (wholesale)
<
[3] Public shadow money (M3):
Implicit official liquidity and credit puts via Treasury collateral involved, but no direct puts on the liability side.
P-Repos (o/n) …
…
Reserves Deposits (o/n) < Insured P-Loans money
P-Notes
P-Repos (term)
[4] Private shadow money (M3):
No official puts, not even implicitly via the collateral involved. Peripheral money
Money Funds (prime)
T-Repos (o/n)
P-Repos (o/n) …
M3
…
Reserves (o/n) <
M3
Dealer Banks (credit desk)
…
Private Assets
Banks (retail)
Public shadow
…
The shadow banking system…
Source: Pozsar (2014)
M0
Sovereign (U.S. Treasury)
Assets
Traditional money supply vs. shadow money supply.
Currency Reserves
Ability to tax and money creation at will
…
Purely public, hybrid and purely private money claims.
T-Notes
…
Public Assets
The types of assets and the types of backstops behind money claims yield four basic categories of money.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
P-Loans
Deposits (term)
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n) Private sha dow
Private Backstops Liabilities
M3
48
The hierarchy of money:
[1] Public money (M0, or base money):
Reserves (o/n)
T-Repos (o/n)
<
T-Repos (o/n)
T-Notes
T-Repos (term)
[2] Insured money (M1 and M2):
Explicit liquidity puts from the Fed, and explicit credit puts from the sovereign (i.e. the FDIC) on all deposits < $250K.
Money Funds (government-only)
T-Bills
T-Repos (o/n)
Public money
T-Bills (term)
<
T-CNAVs (o/n)
Banks (retail)
P-Repos (o/n) M1 M2
Banks (wholesale)
<
[3] Public shadow money (M3):
Implicit official liquidity and credit puts via Treasury collateral involved, but no direct puts on the liability side.
P-Repos (o/n) …
…
Reserves Deposits (o/n) < Insured P-Loans money
P-Notes
P-Repos (term)
[4] Private shadow money (M3):
No official puts, not even implicitly via the collateral involved. Peripheral money
Money Funds (prime)
T-Repos (o/n)
P-Repos (o/n) …
M3
…
Reserves (o/n) <
M3
Dealer Banks (credit desk)
…
Private Assets
[1] Public-private subsystem (public collateral, maturity and liquidity transformation see Carney and Panetta, 2011)
Public shadow
…
The shadow banking system…
Source: Pozsar (2014)
M0
Sovereign (U.S. Treasury)
Assets
Traditional money supply vs. shadow money supply.
Currency Reserves
Ability to tax and money creation at will
…
Purely public, hybrid and purely private money claims.
T-Notes
…
Public Assets
The types of assets and the types of backstops behind money claims yield four basic categories of money.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
P-Loans
Deposits (term)
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n) Private sha dow
Private Backstops Liabilities
M3
49
The hierarchy of money:
[1] Public money (M0, or base money):
Reserves (o/n)
T-Repos (o/n)
<
T-Repos (o/n)
T-Notes
T-Repos (term)
[2] Insured money (M1 and M2):
Explicit liquidity puts from the Fed, and explicit credit puts from the sovereign (i.e. the FDIC) on all deposits < $250K.
Money Funds (government-only)
T-Bills
T-Repos (o/n)
Public money
T-Bills (term)
<
T-CNAVs (o/n)
Banks (retail)
P-Repos (o/n) M1 M2
Banks (wholesale)
P-Notes
P-Repos (term)
Implicit official liquidity and credit puts via Treasury collateral involved, but no direct puts on the liability side.
[4] Private shadow money (M3):
No official puts, not even implicitly via the collateral involved. Peripheral money
Money Funds (prime)
T-Repos (o/n)
M3
P-Repos (o/n) …
Reserves (o/n) <
<
[3] Public shadow money (M3):
P-Repos (o/n) …
…
Reserves Deposits (o/n) < Insured P-Loans money
…
[2] Purely private subsystem (private collateral, credit, maturity and liquidity trafo, see Pozsar et al, 2010)
M3
Dealer Banks (credit desk)
…
Private Assets
[1] Public-private subsystem (public collateral, maturity and liquidity transformation see Carney and Panetta, 2011)
Public shadow
…
The shadow banking system…
Source: Pozsar (2014)
M0
Sovereign (U.S. Treasury)
Assets
Traditional money supply vs. shadow money supply.
Currency Reserves
Ability to tax and money creation at will
…
Purely public, hybrid and purely private money claims.
T-Notes
…
Public Assets
The types of assets and the types of backstops behind money claims yield four basic categories of money.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
P-Loans
Deposits (term)
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n) Private sha dow
Private Backstops Liabilities
M3
50
For dealers, money is o/n T-Repos with large banks.
T-Notes Public Assets
Recall that only banks and the sovereign can have reserve accounts at the Fed.
T-Repos (o/n)
<
T-Repos (o/n)
T-Notes
T-Repos (term)
Money Funds (government-only) T-Repos (o/n)
Public money
T-Bills (term)
<
T-CNAVs (o/n)
…
T-Bills
Banks (retail)
P-Repos (o/n)
M3
M1 M2
Banks (wholesale)
<
P-Repos (o/n) …
…
Reserves Deposits (o/n) < Insured P-Loans money
P-Notes
P-Repos (term)
Money Funds (prime)
T-Repos (o/n)
P-Repos (o/n) …
M3
…
Reserves (o/n) <
Public shadow
Dealer Banks (credit desk)
…
Private Assets
Source: Pozsar (2014)
M0
…
Assets
No longer…
Currency Reserves
Sovereign (U.S. Treasury) Reserves (o/n)
For money funds, money is o/n T-Repos with dealers.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Enter the Fed’s RRPs:
P-Loans
Deposits (term)
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n) Private sha dow
Private Backstops Liabilities
M3
51
Central Bank (Federal Reserve)
Source: Pozsar (2014)
Currency Reserves
M0
Sovereign (U.S. Treasury)
T-Repos (o/n)
T-Notes
T-Repos (term)
Money Funds (government-only)
T-Bills
RRPs (o/n)
Public money
T-Bills (term)
<
T-CNAVs (o/n)
…
Reserves (o/n)
<
…
RRPs (o/n)
Banks (retail)
RRPs (o/n)
M3
M1 M2
Banks (wholesale)
<
P-Repos (o/n) …
…
Reserves Deposits (o/n) < Insured P-Loans money
P-Notes
P-Repos (term)
Money Funds (prime)
T-Repos (o/n)
RRPs (o/n) …
M3
…
Reserves (o/n) <
Public shadow
Dealer Banks (credit desk)
…
Private Assets
RRPs are likely a station, not a destination (more on this shortly in Part II).
RRP (o/n)
…
T-Notes
Assets
Public Assets
RRPs effectively give money funds and dealers, the core entities of the shadow banking system, access to a reserve account at the Fed for the very first time in U.S. monetary history. Do appreciate the evolutionary significance of this step and look beyond the view that the only significance of RRPs is that they will help the Fed control short rates.
Dealer Banks (government desk)
…
Enter the Fed’s RRPs:
P-Loans
Deposits (term)
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n) Private sha dow
Private Backstops Liabilities
M3
52
Overnight money claims by type: $ billions
3,500
3,000
2,500
2,000
1,500
1,000
500
0 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
Source: Federal Reserve Z.1 and H.8, New York Fed (FR 2004), FDIC, U.S. Treasury
53
Term money claims by type: $ billions
6,000
5,000
4,000
3,000
2,000
1,000
0 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
54
Source: Federal Reserve Z.1 and H.8, New York Fed (FR 2004) and author’s calculations
1. The Hierarchy of Money. 2. The Hierarchy of Access. 3. The Hierarchy of Uses..
4. The Dealer Eco-System. 5. The Macro Perspective. 6. Policy Implications... 55
Retail cash investors:
Central Bank (Federal Reserve)
Assets
…
T-Repos (o/n) T-Repos (term)
Money Funds (government-only)
T-Bills (o/n)
T-Repos (o/n)
T-Bills (term)
T-Bills (term)
Banks (insured)
<
T-CNAVs (o/n)
Dealer Banks (credit desk)
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
…
Reserves Deposits (o/n) < (o/n) P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (wholesale)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (prime)
…
Private Assets
<
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
Source: Pozsar (2014)
T-Repos (o/n)
…
Public Assets
Holdings of cash and insured bank deposits.
Currency Reserves (o/n)
…
T-Notes
…
Mom and pop depositors.
Dealer Banks (government desk)
P-Loans
Deposits (term)
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n)
Private Backstops Liabilities
56
Institutional cash pools:
Central Bank (Federal Reserve) Currency Reserves (o/n)
T-Repos (o/n)
<
T-Notes
T-Repos (term)
Cash portfolio managers (PM).
Money Funds (government-only)
T-Bills (o/n)
T-Repos (o/n) …
Reserves (o/n)
Assets
Restricted to invest mostly in money market instruments.
Sovereign (U.S. Treasury)
…
Mandate: “Do not lose”.
T-Bills (term)
T-Bills (term)
Banks (retail)
T-CNAVs (o/n)
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (wholesale)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (prime)
…
Private Assets
<
Dealer Banks (credit desk)
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
T-Repos (o/n) …
T-Notes
…
Public Assets
At least $10bn in cash AuM (see Pozsar, 2011 and 2012).
Dealer Banks (government desk)
P-Loans
Deposits (term)
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n)
Private Backstops Liabilities
57
Central Bank (Federal Reserve)
T-Repos (o/n)
<
T-Repos (term)
"Cash" (term)
[1] FX reserve managers’ liquidity tranches.
T-Repos (o/n) …
T-Bills (o/n) T-Bills (term)
T-Bills (term)
Banks (retail)
T-CNAVs (o/n)
…
…
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (wholesale)
Money Funds (prime)
…
P-Repos (o/n)
…
T-Repos (o/n)
…
Private Assets
Source: Pozsar (2014)
<
Dealer Banks (credit desk)
Reserves Deposits (o/n) < (o/n)
Reserves (o/n) <
Equity (permanent)
Money Funds (government-only)
…
Assets
Restricted to invest mostly in money market instruments.
Sovereign (U.S. Treasury) Reserves (o/n)
"Cash" (o/n)
T-Notes
Cash portfolio managers (PM). Mandate: “Do not lose”.
T-Repos (o/n)
…
Currency Reserves (o/n)
…
T-Notes
Cash PM (reserve managers)
…
Public Assets
At least $10bn in cash AuM (see Pozsar, 2011 and 2012).
Dealer Banks (government desk)
…
Institutional cash pools:
P-Loans
Deposits (term)
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n)
Private Backstops Liabilities
58
T-Repos (o/n)
<
T-Repos (term)
"Cash" (term)
T-Bills (term)
T-Bills (term)
"Cash" (term)
Equity (permanent)
Dealer Banks (credit desk)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
…
Reserves Deposits (o/n) < (o/n) P-Loans
Deposits (term)
P-Notes
P-Repos (term)
Banks (wholesale)
Money Funds (prime) P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
"Cash" (o/n) …
T-CNAVs (o/n)
…
Private Assets
<
…
T-Repos (o/n)
Equity (permanent)
Cash PM (corporations)
…
T-Bills (o/n)
Banks (retail)
[2] Global corporate cash balances (on and offshore).
Source: Pozsar (2014)
Money Funds (government-only)
…
[1] FX reserve managers’ liquidity tranches.
Assets
Restricted to invest mostly in money market instruments.
Sovereign (U.S. Treasury) Reserves (o/n)
"Cash" (o/n)
T-Notes
Cash portfolio managers (PM). Mandate: “Do not lose”.
T-Repos (o/n)
…
Currency Reserves (o/n)
…
T-Notes
Cash PM (reserve managers)
…
Public Assets
At least $10bn in cash AuM (see Pozsar, 2011 and 2012).
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Institutional cash pools:
P-Loans
Deposits (term)
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n)
Private Backstops Liabilities
59
<
T-Repos (term)
"Cash" (term)
"Cash" (o/n) …
T-CNAVs (o/n)
T-Bills (term)
T-Bills (term)
"Cash" (term)
Dealer Banks (credit desk)
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
…
Reserves Deposits (o/n) < (o/n) P-Loans
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
Equity (temporary)
Money Funds (prime) P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Equity (permanent)
Cash PM (asset managers)
…
Private Assets
[3] Institutional investors’ pooled cash balances.
<
…
T-Repos (o/n)
Equity (permanent)
Cash PM (corporations)
…
T-Bills (o/n)
Banks (retail)
[2] Global corporate cash balances (on and offshore).
Source: Pozsar (2014)
Money Funds (government-only)
…
[1] FX reserve managers’ liquidity tranches.
Assets
Restricted to invest mostly in money market instruments.
Sovereign (U.S. Treasury) Reserves (o/n)
"Cash" (o/n)
T-Notes
Cash portfolio managers (PM). Mandate: “Do not lose”.
T-Repos (o/n)
…
T-Repos (o/n)
…
Currency Reserves (o/n)
…
T-Notes
Cash PM (reserve managers)
…
Public Assets
At least $10bn in cash AuM (see Pozsar, 2011 and 2012).
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Institutional cash pools:
P-Loans
Deposits (term)
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n)
Private Backstops Liabilities
60
<
T-Repos (term)
"Cash" (term)
…
"Cash" (o/n)
T-Bills (term)
T-Bills (term)
"Cash" (term)
Dealer Banks (credit desk)
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
…
Reserves Deposits (o/n) < (o/n) P-Loans
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
P-Repos (o/n)
<
P-CNAVs (o/n)
"Cash" (o/n) …
T-Repos (o/n)
P-Loans
Deposits (term)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
Equity (temporary)
Cash PM (seclenders)
…
Reserves (o/n) <
Money Funds (prime)
Equity (permanent)
Cash PM (asset managers)
…
[4] Seclenders’ cash collateral reinvestment accounts.
T-CNAVs (o/n)
…
Private Assets
[3] Institutional investors’ pooled cash balances.
<
…
T-Repos (o/n)
Equity (permanent)
Cash PM (corporations)
…
T-Bills (o/n)
Banks (retail)
[2] Global corporate cash balances (on and offshore).
Source: Pozsar (2014)
Money Funds (government-only)
…
[1] FX reserve managers’ liquidity tranches.
Assets
Restricted to invest mostly in money market instruments.
Sovereign (U.S. Treasury) Reserves (o/n)
"Cash" (o/n)
T-Notes
Cash portfolio managers (PM). Mandate: “Do not lose”.
T-Repos (o/n)
…
T-Repos (o/n)
…
Currency Reserves (o/n)
…
T-Notes
Cash PM (reserve managers)
…
Public Assets
At least $10bn in cash AuM (see Pozsar, 2011 and 2012).
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Institutional cash pools:
Cash (collateral)
61
Institutional cash pools: $ billions
6,000
5,000
4,000
3,000
2,000
1,000
0 1997 Reserve managers
2000 Corporations
07Q2 Institutional Investors
13Q3 Securities lenders
Source: Federal Reserve Z.1, BIS, ICI and author’s calculations
62
Tough to be safe on scale:
[1]
"Cash" (o/n)
T-Notes
T-Repos (term)
"Cash" (term)
T-Repos (o/n) …
…
T-CNAVs (o/n)
Equity (permanent)
Cash PM (corporations)
T-Bills
Public money
T-Bills (term)
"Cash" (term)
<
…
T-Repos (o/n)
…
<
Money Funds (government-only)
"Cash" (o/n)
Equity (permanent)
[1] Banks (retail)
Dealer Banks (credit desk)
… …
…
…
Insured money
P-Repos (term)
"Cash" (term)
Equity
Banks (wholesale)
Money Funds (prime) <
P-CNAVs (o/n)
"Cash" (o/n) …
P-Repos (o/n) …
T-Repos (o/n)
P-Loans
Deposits (term)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
(temporary)
Cash PM (seclenders)
…
Reserves (o/n) <
"Cash" (o/n)
P-Notes
…
P-Loans
<
P-Repos (o/n)
…
P-Repos (o/n)
Cash PM (asset managers)
…
Private Assets
Reserves Deposits (o/n) < (insured)
Source: Pozsar (2014)
T-Repos (o/n)
Sovereign (U.S. Treasury) Reserves (o/n)
Assets
Currency Reserves
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
[1] Cash pools do not have access to M0, M1 or M2.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
Cash (collateral)
63
Tough to be safe on scale:
[1]
T-Repos (term)
"Cash" (term)
T-Bills
T-Repos (o/n)
Public money
T-Bills (term)
"Cash" (term)
<
T-CNAVs (o/n)
Equity (permanent)
Cash PM (corporations)
…
Money Funds (government-only)
…
"Cash" (o/n) …
T-Repos (o/n)
… Assets
<
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
"Cash" (o/n)
Equity (permanent)
[1] Banks (retail)
Dealer Banks (credit desk)
… …
…
Insured money
P-Repos (term)
"Cash" (term)
Equity
Banks (wholesale)
Money Funds (prime) <
P-CNAVs (o/n)
"Cash" (o/n) …
P-Repos (o/n) …
T-Repos (o/n)
P-Loans
Deposits (term)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
(temporary)
Cash PM (seclenders)
…
Reserves (o/n) <
"Cash" (o/n)
P-Notes
…
P-Loans
<
P-Repos (o/n) …
P-Repos (o/n)
Cash PM (asset managers)
…
Private Assets
Reserves Deposits (o/n) < (insured)
Source: Pozsar (2014)
T-Repos (o/n)
…
…for cash pools, money begins where M2 ends.
Currency Reserves
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
[1] Cash pools do not have access to M0, M1 or M2…
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
Cash (collateral)
64
Tough to be safe on scale:
[1]
…
"Cash" (o/n)
…
T-Repos (o/n)
T-Notes
T-Repos (term)
"Cash" (term)
Equity (permanent)
Reserves (o/n)
Money Funds (government-only)
(no t eno ugh )
T-Repos (o/n)
Public money
T-Bills (term)
"Cash" (term)
T-Bills
<
T-CNAVs (o/n)
Cash PM (corporations) "Cash" (o/n)
…
Sovereign (U.S. Treasury)
…
Assets
<
[2]
[2] Cash pools cannot get enough U.S. Treasury bills…
Equity (permanent)
[1] Banks (retail)
Dealer Banks (credit desk)
… …
…
Insured money
P-Repos (term)
"Cash" (term)
Equity
Banks (wholesale)
Money Funds (prime) <
P-CNAVs (o/n)
"Cash" (o/n) …
P-Repos (o/n) …
T-Repos (o/n)
P-Loans
Deposits (term)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
(temporary)
Cash PM (seclenders)
…
Reserves (o/n) <
"Cash" (o/n)
P-Notes
…
P-Loans
<
P-Repos (o/n) …
P-Repos (o/n)
Cash PM (asset managers)
…
Private Assets
Reserves Deposits (o/n) < (insured)
Source: Pozsar (2014)
T-Repos (o/n)
…
For cash pools, money begins where M2 ends.
Currency Reserves
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
[1] Cash pools do not have access to M0, M1 or M2.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
Cash (collateral)
65
Tough to be safe on scale:
[1]
…
…
"Cash" (o/n)
T-Repos (term)
"Cash" (term)
Equity (permanent)
(no t eno ugh )
T-Repos (o/n)
Public money
T-Bills (term)
"Cash" (term)
T-Bills
<
T-CNAVs (o/n)
Cash PM (corporations) "Cash" (o/n)
…
Reserves (o/n)
Money Funds (government-only)
…
Assets
T-Repos (o/n)
T-Notes
Sovereign (U.S. Treasury)
Equity (permanent)
[1] Banks (retail)
Dealer Banks (credit desk)
… …
…
Insured money
P-Repos (term)
"Cash" (term)
Equity
Banks (wholesale)
Money Funds (prime) <
P-CNAVs (o/n)
"Cash" (o/n) …
P-Repos (o/n) …
T-Repos (o/n)
P-Loans
Deposits (term)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
(temporary)
Cash PM (seclenders)
…
Reserves (o/n) <
"Cash" (o/n)
P-Notes
…
P-Loans
<
P-Repos (o/n) …
P-Repos (o/n)
Cash PM (asset managers)
…
Private Assets
Reserves Deposits (o/n) < (insured)
Source: Pozsar (2014)
<
[2]
[2] Cash pools cannot get enough U.S. Treasury bills… …inelastic supply of public money claims.
T-Repos (o/n)
…
For cash pools, money begins where M2 ends.
Currency Reserves
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
[1] Cash pools do not have access to M0, M1 or M2.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
Cash (collateral)
66
Tough to be safe on scale:
[1]
…
…
"Cash" (o/n)
T-Repos (term)
"Cash" (term)
Equity (permanent)
(no t eno ugh )
T-Repos (o/n)
Public money
T-Bills (term)
"Cash" (term)
T-Bills
<
T-CNAVs (o/n)
Cash PM (corporations) "Cash" (o/n)
…
Reserves (o/n)
Money Funds (government-only)
…
Assets
T-Repos (o/n)
T-Notes
Sovereign (U.S. Treasury)
Equity (permanent)
[1] Banks (retail)
Dealer Banks (credit desk)
…
Insured money
"Cash" (o/n) … …
P-Loans
<
P-Repos (o/n) …
P-Repos (o/n) P-Notes
P-Repos (term)
"Cash" (term)
Equity
…
(temporary)
[3] Banks (wholesale)
P-Repos (o/n)
<
P-CNAVs (o/n)
"Cash" (o/n) …
T-Repos (o/n)
Cash PM (seclenders)
…
Reserves (o/n) <
Money Funds (prime)
…
Private Assets
Reserves Deposits (o/n) < (insured)
Cash PM (asset managers)
…
[3] Cash pools have limits on un-secured credit risk…
P-Loans
Deposits
P-Bills (term)
"Cash" (term)
(uninsured )
Source: Pozsar (2014)
<
[2]
[2] Cash pools cannot get enough U.S. Treasury bills… …inelastic supply of public money claims.
T-Repos (o/n)
…
For cash pools, money begins where M2 ends.
Currency Reserves
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
[1] Cash pools do not have access to M0, M1 or M2.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
Public Backstops
Private Backstops Liabilities
Cash (collateral)
67
Tough to be safe on scale:
[1]
…
…
"Cash" (o/n)
T-Repos (term)
"Cash" (term)
Equity (permanent)
(no t eno ugh )
T-Repos (o/n)
Public money
T-Bills (term)
"Cash" (term)
T-Bills
<
T-CNAVs (o/n)
Cash PM (corporations) "Cash" (o/n)
…
Reserves (o/n)
Money Funds (government-only)
…
Assets
T-Repos (o/n)
T-Notes
Sovereign (U.S. Treasury)
Equity (permanent)
[1] Banks (retail)
Dealer Banks (credit desk)
… …
…
Insured money
"Cash" (o/n)
…
P-Loans
<
P-Repos (o/n)
P-Notes
P-Repos (term)
"Cash" (term)
Equity (temporary)
[3] Banks (wholesale)
P-Repos (o/n)
<
P-CNAVs (o/n)
"Cash" (o/n) …
T-Repos (o/n)
Cash PM (seclenders)
…
Reserves (o/n) <
Money Funds (prime)
…
…inelastic demand for un-insured bank deposits.
P-Repos (o/n)
…
Private Assets
Reserves Deposits (o/n) < (insured)
Cash PM (asset managers)
…
[3] Cash pools have limits on un-secured credit risk…
P-Loans
Deposits
P-Bills (term)
"Cash" (term)
(uninsured )
Source: Pozsar (2014)
<
[2]
[2] Cash pools cannot get enough U.S. Treasury bills… …inelastic supply of public money claims.
T-Repos (o/n)
…
For cash pools, money begins where M2 ends.
Currency Reserves
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
[1] Cash pools do not have access to M0, M1 or M2.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
Public Backstops
Private Backstops Liabilities
Cash (collateral)
68
Central Bank (Federal Reserve)
Assets
…
"Cash" (term)
Equity (permanent)
Public money
T-Bills (term)
<
T-CNAVs (o/n)
"Cash" (o/n)
Public shadow
"Cash" (term)
…
T-Repos (o/n)
T-Bills
Cash PM (corporations)
…
(no t eno ugh )
Equity (permanent)
[4] Banks (retail)
Dealer Banks (credit desk)
… …
…
Insured money
"Cash" (o/n)
…
P-Loans
<
P-Repos (o/n)
Cash PM (asset managers)
…
P-Repos (o/n) P-Notes
P-Repos (term)
"Cash" (term)
Equity
…
Reserves Deposits (o/n) < (insured)
(temporary)
[3] Banks (wholesale)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (prime)
…
Private Assets
"Cash" (o/n)
T-Repos (term)
…
Reserves (o/n)
P-Loans
Deposits
P-Bills (term)
(uninsured )
Source: Pozsar (2014)
T-Repos (o/n)
Money Funds (government-only)
[1]
…inelastic demand for un-insured bank deposits.
<
T-Notes
Sovereign (U.S. Treasury)
[3] Cash pools have limits on un-secured credit risk…
[4] Cash pools opt for second best alternatives…
T-Repos (o/n)
[2]
[2] Cash pools cannot get enough U.S. Treasury bills… …inelastic supply of public money claims.
Currency Reserves
Cash PM (reserve managers)
…
Public Assets
T-Notes
Dealer Banks (government desk)
…
[1] Cash pools do not have access to M0, M1 or M2.
For cash pools, money begins where M2 ends.
[4]
…
[1]
Public Backstops
<
P-CNAVs (o/n)
"Cash" (o/n)
Private sha dow
"Cash" (term)
Private Backstops Liabilities
Cash PM (seclenders) Cash (collateral)
…
Tough to be safe on scale:
69
Central Bank (Federal Reserve)
Assets
…
"Cash" (term)
Equity (permanent)
Public money
T-Bills (term)
<
T-CNAVs (o/n)
"Cash" (o/n)
Public shadow
"Cash" (term)
…
T-Repos (o/n)
T-Bills
Cash PM (corporations)
…
(no t eno ugh )
…
Reserves (o/n)
Equity (permanent)
[4] Banks (retail)
Dealer Banks (credit desk)
… …
…
Insured money
"Cash" (o/n)
…
P-Loans
<
P-Repos (o/n)
Cash PM (asset managers)
…
P-Repos (o/n) P-Notes
P-Repos (term)
"Cash" (term)
Equity
…
Reserves Deposits (o/n) < (insured)
(temporary)
[3] Banks (wholesale) T-Repos (o/n)
P-Repos (o/n) …
Reserves (o/n) <
Money Funds (prime)
…
Private Assets
"Cash" (o/n)
T-Repos (term)
…
…the elastic middle of shadow money claims. Source: Pozsar (2014)
T-Repos (o/n)
Money Funds (government-only)
[1]
…inelastic demand for un-insured bank deposits.
<
T-Notes
Sovereign (U.S. Treasury)
[3] Cash pools have limits on un-secured credit risk…
[4] Cash pools opt for second best alternatives…
T-Repos (o/n)
[2]
[2] Cash pools cannot get enough U.S. Treasury bills… …inelastic supply of public money claims.
Currency Reserves
Cash PM (reserve managers)
…
Public Assets
T-Notes
Dealer Banks (government desk)
…
[1] Cash pools do not have access to M0, M1 or M2.
For cash pools, money begins where M2 ends.
[4]
…
[1]
P-Loans
Deposits
P-Bills (term)
(uninsured )
Public Backstops
<
P-CNAVs (o/n)
"Cash" (o/n)
Private sha dow
"Cash" (term)
Private Backstops Liabilities
Cash PM (seclenders) Cash (collateral)
…
Tough to be safe on scale:
70
[4] Central Bank (Federal Reserve)
T-Repos (o/n)
<
T-Repos (o/n)
T-Notes
T-Repos (term)
"Cash" (term)
Money Funds (government-only)
(no t eno ugh )
T-Repos (o/n)
Public money
T-Bills (term)
<
T-CNAVs (o/n)
"Cash" (o/n)
Public shadow
"Cash" (term)
[1]
[4] Banks (retail)
Dealer Banks (credit desk)
… …
…
Insured money
"Cash" (o/n)
P-Notes
P-Repos (term)
"Cash" (term)
Equity
…
P-Loans
<
P-Repos (o/n) …
P-Repos (o/n)
Cash PM (asset managers)
…
Reserves Deposits (o/n) < (insured)
(temporary)
[3] Banks (wholesale)
P-Repos (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (prime)
…
Private Assets
Equity (permanent)
P-Loans
Deposits
P-Bills (term)
(uninsured )
Public Backstops
<
P-CNAVs (o/n)
"Cash" (o/n)
Private sha dow
"Cash" (term)
Private Backstops Liabilities
Cash PM (seclenders) Cash (collateral)
…
Assets
…
T-Bills
Cash PM (corporations) …
Sovereign (U.S. Treasury)
Onshore:
[6] CP Source: Pozsar (2014)
Equity (permanent)
[2]
Reserves (o/n)
[5] CD
"Cash" (o/n) …
Currency Reserves
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
Search for yield begins where the matrix ends…
Dealer Banks (government desk)
…
[1]
…
Search for safety vs. yield:
71
[4] Central Bank (Federal Reserve)
T-Repos (o/n)
<
T-Repos (o/n)
T-Notes
T-Repos (term)
"Cash" (term)
Money Funds (government-only)
(no t eno ugh )
T-Repos (o/n)
Public money
T-Bills (term)
T-Bills
<
[1]
T-CNAVs (o/n)
"Cash" (o/n)
Public shadow
"Cash" (term)
Dealer Banks (credit desk)
… …
…
"Cash" (o/n)
…
Insured money
<
P-Repos (o/n)
P-Notes
P-Repos (term)
"Cash" (term)
Equity
…
P-Loans
(temporary)
[3]
…
P-Repos (o/n)
…
T-Repos (o/n)
…
Reserves (o/n) <
Money Funds (prime)
P-Loans
Deposits
P-Bills (term)
Public Backstops
<
P-CNAVs (o/n)
"Cash" (o/n)
Private sha dow
"Cash" (term)
Private Backstops Liabilities
Cash PM (seclenders) Cash (collateral)
…
Banks (wholesale)
(uninsured )
[6] CP [8] ECP Source: Pozsar (2014)
P-Repos (o/n)
Cash PM (asset managers)
…
Reserves Deposits (o/n) < (insured) Private Assets
[7] ECD
Equity (permanent)
[4] Banks (retail)
Offshore:
Cash PM (corporations) …
Sovereign (U.S. Treasury)
… Assets
[5] CD
Equity (permanent)
[2]
Reserves (o/n)
Onshore:
"Cash" (o/n) …
Currency Reserves
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
Search for yield begins where the matrix ends…
Dealer Banks (government desk)
…
[1]
…
Search for safety vs. yield:
72
RRPs (o/n)
RRPs (o/n)
"Cash" (o/n) …
Currency Reserves
T-Notes
T-Repos (term)
"Cash" (term)
Equity (permanent)
(no t eno ugh )
RRPs (o/n)
Public money
T-Bills (term)
T-Bills
<
[1]
Cash PM (corporations)
T-CNAVs (o/n)
"Cash" (o/n)
Public shadow
"Cash" (term)
…
Reserves (o/n)
Money Funds (government-only)
…
Sovereign (U.S. Treasury)
Equity (permanent)
[4] Banks (retail)
Dealer Banks (credit desk)
… …
…
Insured money
"Cash" (o/n)
P-Notes
P-Repos (term)
"Cash" (term)
Equity
…
P-Loans
<
P-Repos (o/n) …
RRPs (o/n)
Cash PM (asset managers)
…
Reserves Deposits (o/n) < (insured)
(temporary)
[3] Banks (wholesale)
RRPs (o/n) …
T-Repos (o/n) …
Reserves (o/n) <
Money Funds (prime)
…
Private Assets
T-Repos (o/n)
[2]
P-Loans
Deposits
P-Bills (term)
(uninsured )
Source: Pozsar (2014)
<
…
Cash PM (reserve managers)
…
Public Assets
Assets
That is, corporations and asset managers are still constrained to holding mostly shadow money claims.
T-Notes
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
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 safest of safe assets around).
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.
[4]
…
[1]
Public Backstops
<
P-CNAVs (o/n)
"Cash" (o/n)
Private sha dow
"Cash" (term)
Private Backstops Liabilities
Cash PM (seclenders) Cash (collateral)
…
RRPs and cash pools:
73
T-Notes
T-Repos (term)
"Cash" (term)
T-Repos (o/n)
Equity (permanent)
[2]
RRPs (o/n)
Public money
T-Bills (term)
T-Bills
<
[1]
Cash PM (corporations)
T-CNAVs (o/n)
"Cash" (o/n)
Public shadow
"Cash" (term)
…
(no t eno ugh )
…
Reserves (o/n)
Money Funds (government-only)
…
Sovereign (U.S. Treasury)
Equity (permanent)
[4] Banks (retail)
Dealer Banks (credit desk)
…
Insured money
"Cash" (o/n) … …
P-Loans
<
P-Repos (o/n) …
RRPs (o/n)
Cash PM (asset managers)
…
Reserves Deposits (o/n) < (insured)
P-Notes
P-Repos (term)
"Cash" (term)
Equity (temporary)
[3] Banks (wholesale) Reserves (o/n) <
Money Funds (prime)
T-Repos (o/n)
RRPs (o/n)
P-Loans
Deposits
P-Bills (term)
(uninsured )
Source: Pozsar (2014)
<
…
Currency Reserves
…
Private Assets
This could be an evolutionary step toward Mehrling’s “dealer of last resort” in Bagehot 21st century sense.
"Cash" (o/n)
…
Assets
The implementation of minimum RRP balances would increase the safety of shadow money claims further still.
RRPs (o/n)
…
Required minimum RRP balances for shadow banks could become equivalent to what minimum reserve requirements are for traditional banks.
RRPs (o/n)
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
Central Bank (Federal Reserve)
Consider RRPs potential as a macro-prudential tool.
Dealer Banks (government desk)
…
[4]
…
[1]
Public Backstops
<
P-CNAVs (o/n)
"Cash" (o/n)
Private sha dow
"Cash" (term)
Private Backstops Liabilities
Cash PM (seclenders) Cash (collateral)
…
RRPs and cash pools:
74
Cash pools’ access to overnight money: $ billions
2,500
2,000
1,500
1,000
500
0 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
Source: Haver, Federal Reserve Board, Federal Reserve Bank of New York, FDIC
75
Not all un-insured demand deposits belong to cash pools: $ billions
2,500
Banks with $50 < assets < $100 billion: 4,200 accts., each $2.2 million on avg. 2,000
Banks with assets of over $100 billion: 24,800 accts, each $2.9 million on avg. 1,500
1,000
500
0 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
Source: Haver, Federal Reserve Board, Federal Reserve Bank of New York, FDIC
76
Cash pools’ access to term money: $ billions
2,500
2,000
1,500
1,000
500
0 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
Source: Haver, Federal Reserve Board, Federal Reserve Bank of New York
77
Not all large time deposits belong to cash pools: $ billions
2,500
We do not know what share of large time deposits belong to cash pools vs. SMEs and the wealthy. 2,000
1,500
1,000
500
0 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
Source: Haver, Federal Reserve Board, Federal Reserve Bank of New York
78
1. The Hierarchy of Money. 2. The Hierarchy of Access. 3. The Hierarchy of Uses..
4. The Dealer Eco-System. 5. The Macro Perspective. 6. Policy Implications... 79
…
…
"Cash" (term)
Money Funds (government-only) T-Repos (o/n)
<
T-CNAVs (o/n)
"Cash" (o/n)
T-Bills (term)
T-Bills (term)
"Cash" (term)
Dealer Banks (credit desk)
… …
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
Cash PM (asset managers)
…
P-Repos (o/n)
Equity (permanent)
…
Reserves Deposits (o/n) < (o/n)
Equity (permanent)
Cash PM (corporations)
…
T-Bills (o/n)
"Cash" (o/n)
T-Repos (term)
Banks (retail)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Equity
Banks (wholesale)
<
P-CNAVs (o/n)
"Cash" (o/n) …
P-Repos (o/n) …
Deposit (o/n)
P-Loans (local)
Deposits (term)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
(temporary)
Cash PM (seclenders)
…
Reserves (o/n) <
Money Funds (prime)
…
Private Assets
T-Repos (o/n)
…
Assets
<
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
Source: Pozsar (2014)
T-Repos (o/n) …
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Clear links to the real economy through loans.
T-Notes Public Assets
Retail banks create money and credit ex nihilo (see for example Turner, 2013).
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Money creation:
Cash (collateral)
80
…
…
"Cash" (term)
Money Funds (government-only)
T-Bills (o/n)
"Cash" (o/n)
T-Repos (term)
T-Repos (o/n)
<
T-CNAVs (o/n)
"Cash" (o/n)
T-Bills (term)
"Cash" (term)
Dealer Banks (credit desk)
Cash PM (asset managers)
…
… …
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
Equity (permanent)
…
P-Repos (o/n)
Equity (permanent)
Cash PM (corporations)
T-Bills (term)
Banks (retail)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Equity
Banks (wholesale)
<
P-CNAVs (o/n)
"Cash" (o/n) …
P-Repos (o/n) …
Deposit (o/n)
P-Loans (local)
Deposits (term)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
(temporary)
Cash PM (seclenders)
…
Reserves (o/n) <
Money Funds (prime)
…
Private Assets
T-Repos (o/n)
…
Assets
Reserves (o/n)
<
T-Notes
Sovereign (U.S. Treasury)
Reserves Deposits (o/n) < (o/n)
Source: Pozsar (2014)
T-Repos (o/n) …
Currency Reserves (o/n)
…
There are at least six forms of money dealing…
T-Notes
Cash PM (reserve managers)
…
Public Assets
Money dealing is borrowing and lending of short-term money in the unsecured and secured and local and global (Eurodollar) money markets.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
81
"Cash" (term)
"Cash" (o/n) …
T-CNAVs (o/n)
T-Bills (term)
T-Bills (term)
"Cash" (term)
Dealer Banks (credit desk)
… …
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
…
FF (o/n)
Equity (permanent)
Cash PM (asset managers)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Equity
Banks (wholesale)
<
P-CNAVs (o/n)
"Cash" (o/n) …
P-Repos (o/n) …
<
FF (o/n)
P-Loans (local)
Deposits (term)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
(temporary)
Cash PM (seclenders)
…
FF (o/n)
Money Funds (prime)
…
Private Assets
<
…
T-Repos (o/n)
Equity (permanent)
Cash PM (corporations)
… Assets
"Cash" (o/n)
T-Repos (term)
Banks (retail)
[1]
T-Repos (o/n)
Money Funds (government-only)
T-Bills (o/n)
Reserves (o/n) <
<
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
Source: Pozsar (2014)
T-Repos (o/n)
…
Currency Reserves (o/n)
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
[1] Interbank money dealing in the federal funds market.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
82
T-Repos (o/n)
"Cash" (term)
"Cash" (o/n) …
T-CNAVs (o/n)
T-Bills (term)
T-Bills (term)
"Cash" (term)
Dealer Banks (credit desk)
… …
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
…
FF (o/n)
Equity (permanent)
Cash PM (asset managers)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Equity
Banks (wholesale)
<
P-CNAVs (o/n)
"Cash" (o/n) …
P-Repos (o/n) …
<
FF (o/n)
P-Loans (local)
Deposits (term)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
(temporary)
Cash PM (seclenders)
…
FF (o/n)
Money Funds (prime)
…
Private Assets
<
…
T-Repos (o/n)
Equity (permanent)
Cash PM (corporations)
… Assets
"Cash" (o/n)
T-Repos (term)
Banks (retail)
[1]
T-Repos (o/n)
Money Funds (government-only)
T-Bills (o/n)
Reserves (o/n) <
<
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
Source: Pozsar (2014)
[2]
…
[2] Interdealer money dealing in the GCF repo market.
Currency Reserves (o/n)
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
[1] Interbank money dealing in the federal funds market.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
83
T-Repos (o/n)
"Cash" (term)
"Cash" (o/n)
T-Bills (term)
"Cash" (term)
Dealer Banks (credit desk)
… …
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
…
FF (o/n)
Equity (permanent)
Cash PM (asset managers)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Equity
Banks (wholesale)
P-Repos (o/n)
<
P-CNAVs (o/n)
"Cash" (o/n) …
[3]
…
<
FF (o/n)
P-Loans (local)
Deposits (term)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
(temporary)
Cash PM (seclenders)
…
FF (o/n)
Money Funds (prime)
…
Private Assets
T-CNAVs (o/n)
T-Bills (term)
Banks (retail)
[1]
<
…
T-Repos (o/n)
Equity (permanent)
Cash PM (corporations)
…
[3]
"Cash" (o/n)
T-Repos (term)
Money Funds (government-only)
T-Bills (o/n)
Reserves (o/n) <
T-Repos (o/n)
…
Assets
Reserves (o/n)
<
T-Notes
Sovereign (U.S. Treasury)
[3] Interlinked money dealing in the TRP repo market (cash PM -> MMF -> dealer).
Source: Pozsar (2014)
[2]
…
[2] Interdealer money dealing in the GCF repo market.
Currency Reserves (o/n)
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
[1] Interbank money dealing in the federal funds market.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
84
T-Repos (term)
"Cash" (term)
T-CNAVs (o/n)
"Cash" (o/n)
T-Bills (term)
T-Bills (term)
"Cash" (term)
Dealer Banks (credit desk)
… …
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
…
FF (o/n)
Equity (permanent)
Cash PM (asset managers)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Equity
Banks (wholesale)
P-Repos (o/n)
<
P-CNAVs (o/n)
"Cash" (o/n) …
[3]
…
<
FF (o/n)
P-Loans (global)
Deposits (term)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
(temporary)
Cash PM (seclenders)
…
FF (o/n)
Money Funds (prime)
…
Private Assets
<
…
T-Repos (o/n)
Equity (permanent)
Cash PM (corporations)
…
[3]
"Cash" (o/n)
T-Notes
Banks (retail)
[1]
T-Repos (o/n)
Money Funds (government-only)
T-Bills (o/n)
Reserves (o/n) <
<
…
Assets
Reserves (o/n)
[4]
Source: Pozsar (2014)
T-Repos (o/n)
Sovereign (U.S. Treasury)
[3] Interlinked money dealing in the TRP repo market (cash PM -> MMF -> dealer). [4] Interoffice money dealing via the NY branches of foreign banks, funded by selling Yankee CD and CP to prime money funds (see Shin, 2011 and 2013).
[2]
…
[2] Interdealer money dealing in the GCF repo market.
Currency Reserves (o/n)
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
[1] Interbank money dealing in the federal funds market.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
85
Source: Pozsar (2014)
T-Repos (term)
"Cash" (term)
"Cash" (o/n)
T-Bills (term)
"Cash" (term)
Dealer Banks (credit desk)
… …
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
Cash PM (asset managers)
…
P-Repos (o/n)
Equity (permanent)
…
FF (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Equity
Deposits (term)
[5]
<
P-CNAVs (o/n)
"Cash" (o/n) …
P-Loans (global)
P-Repos (o/n)
…
[3]
P-Bills (global)
P-CNAVs (o/n)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
(temporary)
Cash PM (seclenders)
…
<
FF (o/n) …
FF (o/n)
Money Funds (prime)
…
Private Assets
T-CNAVs (o/n)
T-Bills (term)
Banks (wholesale)
[4]
<
…
T-Repos (o/n)
Equity (permanent)
Cash PM (corporations)
…
[3]
"Cash" (o/n)
T-Notes
Banks (retail)
[1]
T-Repos (o/n)
Money Funds (government-only)
T-Bills (o/n)
Reserves (o/n) <
<
…
Reserves (o/n)
Assets
[5] Crossborder money dealing via the headquarters of foreign banks selling Eurodollar CD and CP to prime money market funds.
T-Repos (o/n)
Sovereign (U.S. Treasury)
[3] Interlinked money dealing in the TRP repo market (cash PM -> MMF -> dealer). [4] Interoffice money dealing via the NY branches of foreign banks, funded by selling Yankee CD and CP to prime money funds (see Shin, 2011 and 2013).
[2]
…
[2] Interdealer money dealing in the GCF repo market.
Currency Reserves (o/n)
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
[1] Interbank money dealing in the federal funds market.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
86
T-Repos (o/n)
"Cash" (term)
…
"Cash" (o/n)
T-Bills (term)
"Cash" (term)
Dealer Banks (credit desk)
… …
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
Cash PM (asset managers)
…
[6]
Equity (permanent)
…
FF (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Equity
P-Loans (global)
Deposits (term)
[5]
P-Repos (o/n)
<
P-CNAVs (o/n)
"Cash" (o/n) …
[3]
P-Bills (global)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
(temporary)
Cash PM (seclenders)
…
<
FF (o/n) …
FF (o/n)
Money Funds (prime)
…
Private Assets
T-CNAVs (o/n)
T-Bills (term)
Banks (wholesale)
[4]
<
…
T-Repos (o/n)
Equity (permanent)
Cash PM (corporations)
… Assets
[3]
"Cash" (o/n)
T-Repos (term)
Banks (retail)
[1]
T-Repos (o/n)
Money Funds (government-only)
T-Bills (o/n)
Reserves (o/n) <
<
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
Source: Pozsar (2014)
[2] [6]
…
Currency Reserves (o/n)
…
Public Assets
T-Notes
Cash PM (reserve managers)
…
[6] Client-driven money dealing in the DvP repo market.
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
87
Assets
…
Money Funds (government-only) T-Repos (o/n)
<
T-CNAVs (o/n)
"Cash" (o/n)
T-Bills (term)
T-Bills (term)
"Cash" (term)
Dealer Banks (credit desk)
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
<
P-CNAVs (o/n)
"Cash" (o/n) …
P-Repos (o/n) …
<
FF (o/n)
P-Loans (global)
Deposits (term)
P-Bills (global)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
…
Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Money Funds (prime)
Equity (permanent)
Cash PM (asset managers)
…
FF (o/n)
Equity (permanent)
Cash PM (corporations)
…
Private Assets
Reserves (o/n) <
Source: Pozsar (2014)
"Cash" (term)
Banks (retail)
Risk PM
Risk PM
T-Repos (term)
…
T-Bills (o/n)
"Cash" (o/n)
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
T-Repos (o/n)
…
Risk PM
<
…
Public Assets
Dealers’ buy-side clients: risk portfolio managers (PM).
T-Repos (o/n)
…
Currency Reserves (o/n)
Cash PM (reserve managers)
…
T-Notes
Dealer Banks (government desk)
…
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
88
Source: Pozsar (2014)
…
…
"Cash" (term)
T-Repos (o/n)
<
T-CNAVs (o/n)
"Cash" (o/n)
T-Bills (term)
"Cash" (term)
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
<
P-CNAVs (o/n)
"Cash" (o/n) …
P-Repos (o/n) …
<
FF (o/n)
P-Loans (global)
Deposits (term)
P-Bills (global)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Money Funds (prime)
Equity (permanent)
Cash PM (asset managers)
…
FF (o/n)
…
Cash PM (corporations)
T-Bills (term)
Dealer Banks (credit desk)
Equity (permanent)
…
Money Funds (government-only)
…
Private Assets
Reserves (o/n) <
"Cash" (o/n)
T-Repos (term)
Banks (retail)
Risk PM
T-Repos (o/n)
…
Assets
T-Bills (o/n)
<
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
Risk PM
T-Repos (o/n) …
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Risk PM
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
89
Source: Pozsar (2014)
…
…
"Cash" (term)
T-Repos (o/n)
<
T-CNAVs (o/n)
"Cash" (o/n)
T-Bills (term)
"Cash" (term)
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
<
P-CNAVs (o/n)
"Cash" (o/n) …
P-Repos (o/n) …
<
FF (o/n)
P-Loans (global)
Deposits (term)
P-Bills (global)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Money Funds (prime)
Equity (permanent)
Cash PM (asset managers)
…
FF (o/n)
…
Cash PM (corporations)
T-Bills (term)
Dealer Banks (credit desk)
Equity (permanent)
…
Money Funds (government-only)
…
Private Assets
Reserves (o/n) <
"Cash" (o/n)
T-Repos (term)
Banks (retail)
Risk PM
T-Repos (o/n)
…
Assets
T-Bills (o/n)
<
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
Risk PM
T-Repos (o/n) …
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
90
Source: Pozsar (2014)
…
…
"Cash" (term)
T-Repos (o/n)
<
T-CNAVs (o/n)
"Cash" (o/n)
T-Bills (term)
"Cash" (term)
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
<
P-CNAVs (o/n)
"Cash" (o/n) …
P-Repos (o/n) …
<
FF (o/n)
P-Loans (global)
Deposits (term)
P-Bills (global)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Money Funds (prime)
Equity (permanent)
Cash PM (asset managers)
…
FF (o/n)
…
Cash PM (corporations)
T-Bills (term)
Dealer Banks (credit desk)
Equity (permanent)
…
Money Funds (government-only)
…
Private Assets
Risk PM
"Cash" (o/n)
T-Repos (term)
Banks (retail) Reserves (o/n) <
T-Repos (o/n)
…
Assets
Risk PM (cash for shorting)
T-Bills (o/n)
<
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
Type 2:
T-Repos (o/n) …
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
91
Source: Pozsar (2014)
…
…
"Cash" (term)
T-Repos (o/n)
<
T-CNAVs (o/n)
"Cash" (o/n)
T-Bills (term)
"Cash" (term)
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
<
P-CNAVs (o/n)
"Cash" (o/n) …
P-Repos (o/n) …
<
FF (o/n)
P-Loans (global)
Deposits (term)
P-Bills (global)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Money Funds (prime)
Equity (permanent)
Cash PM (asset managers)
…
FF (o/n)
…
Cash PM (corporations)
T-Bills (term)
Dealer Banks (credit desk)
Equity (permanent)
…
Money Funds (government-only)
…
Risk PM (cash for margining)
Private Assets
Type 3:
"Cash" (o/n)
T-Repos (term)
Banks (retail) Reserves (o/n) <
T-Repos (o/n)
…
Assets
Risk PM (cash for shorting)
T-Bills (o/n)
<
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
Type 2:
T-Repos (o/n) …
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
92
…
T-Notes
T-Repos (term)
"Cash" (term)
T-CNAVs (o/n)
"Cash" (o/n)
T-Bills (term)
"Cash" (term)
Risk PM (cash for shorting)
Banks (retail)
Source: Pozsar (2014)
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
…
FF (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
<
P-CNAVs (o/n)
"Cash" (o/n) …
P-Repos (o/n) …
<
FF (o/n)
P-Loans (global)
Deposits (term)
P-Bills (global)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
…
Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Money Funds (prime)
Equity (permanent)
Cash PM (asset managers)
…
Private Assets
Risk PM (cash for margining)
Dealer Banks (credit desk)
…
<
Cash PM (corporations)
…
T-Repos (o/n)
Equity (permanent)
…
Money Funds (government-only)
T-Bills (term)
Reserves (o/n) <
Type 3:
"Cash" (o/n)
…
T-Bills (o/n)
T-Repos (term)
Equity (temporary)
Type 2:
Reserves (o/n)
<
…
T-Repos (term)
T-Repos (term)
Sovereign (U.S. Treasury)
Assets
T-Notes (RMBS)
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (M-REIT)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
93
…
T-Notes
T-Repos (term)
"Cash" (term)
"Cash" (o/n) "Cash" (term)
Banks (retail)
Source: Pozsar (2014)
…
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale) <
FF (o/n)
P-Repos (o/n)
<
P-CNAVs (o/n)
"Cash" (o/n)
P-Loans (global)
Deposits (term)
P-Bills (global)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
…
Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Money Funds (prime)
…
Risk PM (cash for margining)
P-Repos (o/n)
…
(temporary)
FF (o/n)
…
Reserves (o/n) <
Equity (permanent)
Cash PM (short seller)
…
Equity
Dealer Banks (credit desk)
…
T-CNAVs (o/n)
…
<
Cash PM (corporations)
…
T-Repos (o/n)
Equity (permanent)
…
Money Funds (government-only)
T-Bills (term)
Private Assets
Type 3:
"Cash" (o/n)
T-Bills (term)
Risk PM ("real money") T-Notes P-Notes
T-Bills (o/n)
T-Repos (term)
Equity (temporary)
Type 2:
Reserves (o/n)
<
…
T-Repos (term)
T-Repos (term)
Sovereign (U.S. Treasury)
Assets
T-Notes
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
94
…
"Cash" (term)
T-CNAVs (o/n)
"Cash" (o/n) …
<
"Cash" (term)
Source: Pozsar (2014)
Assets
…
…
Shorts (P-Notes)
…
P-Repos (o/n)
…
<
P-Repos (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
(temporary)
Banks (wholesale) FF (o/n)
<
FF (o/n)
Money Funds (prime) P-Repos (o/n)
<
P-CNAVs (o/n)
"Cash" (o/n)
P-Loans (global)
Deposits (term)
P-Bills (global)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
Equity
Cash PM (seclenders)
…
Risk PM (cash for margining)
P-Repos (term)
…
Equity
FF (o/n) …
(temporary)
Reserves (o/n) <
Cash PM (short seller)
…
T-Notes P-Notes
[A]
Dealer Banks (credit desk)
Equity (permanent)
…
…
P-Repos ( (term)
Banks (retail)
…
Cash PM (corporations)
…
T-Repos (o/n)
Equity (permanent)
…
Money Funds (government-only)
…
Type 3:
T-Repos (term)
T-Bills (term)
…
(collat.)
"Cash" (o/n)
T-Bills (term)
Risk PM (seclender) Cash
T-Bills (o/n)
T-Repos (term)
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
<
Equity (temporary)
Type 2:
T-Repos (term)
…
T-Repos (term)
Private Assets
T-Notes
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collateral)
95
…
T-CNAVs (o/n)
"Cash" (o/n) …
<
"Cash" (term)
Source: Pozsar (2014)
Assets
…
Shorts (P-Notes)
…
P-Repos (o/n)
…
<
P-Repos (o/n)
…
P-Repos (term)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
(temporary)
Banks (wholesale) FF (o/n)
<
FF (o/n)
Money Funds (prime) P-Repos (o/n)
<
P-CNAVs (o/n)
"Cash" (o/n)
P-Loans (global)
Deposits (term)
P-Bills (global)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
Equity
Cash PM (seclenders)
…
[B]
FF (o/n)
…
Risk PM (cash for margining)
Reserves (o/n) <
Cash PM (short seller)
…
Equity (temporary)
[A]
Dealer Banks (credit desk)
Equity (permanent)
…
P-Repos ( (term)
Banks (retail)
…
Cash PM (corporations)
…
T-Repos (o/n)
Equity (permanent)
…
Money Funds (government-only)
…
Type 3:
"Cash" (term)
…
T-Notes P-Notes
T-Repos (term)
T-Bills (term)
…
(collat.)
"Cash" (o/n)
T-Bills (term)
Risk PM (seclender) Cash
T-Bills (o/n)
T-Repos (term)
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
<
Equity (temporary)
Type 2:
T-Repos (term)
…
T-Repos (term)
Private Assets
T-Notes
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collat.)
96
…
"Cash" (term)
T-CNAVs (o/n)
"Cash" (o/n) …
<
Source: Pozsar (2014)
…
…
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale) <
FF (o/n)
P-Repos (o/n)
<
P-CNAVs (o/n)
"Cash" (o/n)
P-Loans (global)
Deposits (term)
P-Bills (global)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Money Funds (prime)
…
Equity (temporary)
P-Repos (term)
…
Risk PM (tactical hedger)
FF (o/n)
Equity (permanent)
Cash PM ("overlay investor")
…
Equity
Private Assets
… (temporary)
Reserves (o/n) <
Dealer Banks (credit desk)
…
Cash PM (corporations)
…
T-Repos (o/n)
Equity (permanent)
…
Money Funds (government-only)
Banks (retail)
P-Repos ( (term)
T-Notes P-Notes
CDS IRS FXS T-Notes P-Notes
T-Repos (term)
"Cash" (term)
…
Type 3:
T-Notes
T-Bills (term)
…
(collat.)
"Cash" (o/n)
T-Bills (term)
Risk PM (cash for shorting) Cash
T-Bills (o/n)
T-Repos (term)
Equity (temporary)
Type 2:
Reserves (o/n)
<
…
T-Repos (term)
T-Repos (term)
Sovereign (U.S. Treasury)
Assets
T-Notes
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collat.)
97
…
"Cash" (term)
…
Source: Pozsar (2014)
…
…
…
…
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale) FF (o/n)
<
…
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
FF (o/n)
"Cash" (o/n) …
Equity (temporary)
P-Loans (local)
…
Risk PM (tactical hedger)
"Cash" (o/n)
…
Equity
<
P-Repos (o/n)
Equity (permanent)
Cash PM ("overlay investor")
…
(temporary)
P-Repos (term)
…
"Cash" (o/n)
Dealer Banks (credit desk)
FF (o/n)
Equity (permanent)
Cash PM (corporations)
T-Bills (o/n)
Reserves (o/n) < Private Assets
…
T-Notes P-Notes
CDS IRS FXS T-Notes P-Notes
T-Repos (term)
Banks (retail)
P-Repos ( (term)
…
Type 3:
T-Notes
"Cash" (term)
…
(collat.)
Reserves (o/n)
"Cash" (o/n)
T-Bills (term)
Risk PM (cash for shorting) Cash
T-Repos (term)
Equity (temporary)
Type 2:
<
…
T-Repos (term)
T-Repos (term)
Sovereign (U.S. Treasury)
Assets
T-Notes
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
P-Loans (global)
Deposits (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
Cash (collat.)
98
…
"Cash" (term)
Swaps
Swaps …
…
"Cash" (o/n) "Cash" (term)
Banks (retail)
Source: Pozsar (2014)
…
…
…
…
"Cash" (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
Swaps
Swaps
(collat.) < (collat.)
"Cash" (o/n) …
<
FF (o/n)
P-Loans (global)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Dealer Banks (CDS)
…
Equity (temporary)
<
P-Repos (o/n)
…
Risk PM (tactical hedger)
P-Repos (term)
…
Equity
FF (o/n)
Equity (permanent)
Cash PM ("overlay investor")
…
(temporary)
Reserves (o/n) < Private Assets
…
P-Repos ( (term)
Dealer Banks (credit desk)
…
Cash PM (corporations)
…
(collat.) < (collat.)
Equity (permanent)
…
Dealer Banks (IRS and FXS)
P-Bills (term)
T-Notes P-Notes
CDS IRS FXS T-Notes P-Notes
T-Repos (term)
Swaps
…
Type 3:
T-Notes
(uncoll.)
…
(collat.)
"Cash" (o/n)
T-Bills (term)
Risk PM (cash for shorting) Cash
T-Bills (o/n)
T-Repos (term)
Equity (temporary)
Type 2:
Reserves (o/n)
<
…
T-Repos (term)
T-Repos (term)
Sovereign (U.S. Treasury)
Assets
T-Notes
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collat.)
99
…
"Cash" (term)
Swaps
Swaps …
…
"Cash" (o/n) "Cash" (term)
Banks (retail)
Source: Pozsar (2014)
…
…
…
…
"Cash" (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
Swaps
Swaps
(collat.) < (collat.)
"Cash" (o/n) …
<
FF (o/n)
P-Loans (global)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Dealer Banks (CDS)
…
Equity (temporary)
<
P-Repos (o/n)
…
Risk PM (tactical hedger)
P-Repos (term)
…
Equity
FF (o/n)
Equity (permanent)
Cash PM ("overlay investor")
…
(temporary)
Reserves (o/n) < Private Assets
…
P-Repos ( (term)
Dealer Banks (credit desk)
…
Cash PM (corporations)
…
(collat.) < (collat.)
Equity (permanent)
…
Dealer Banks (IRS and FXS)
P-Bills (term)
T-Notes P-Notes
CDS IRS FXS T-Notes P-Notes
T-Repos (term)
Swaps
…
Type 3:
T-Notes
(uncoll.)
…
(collat.)
"Cash" (o/n)
T-Bills (term)
Risk PM (cash for shorting) Cash
T-Bills (o/n)
T-Repos (term)
Equity (temporary)
Type 2:
Reserves (o/n)
<
…
T-Repos (term)
T-Repos (term)
Sovereign (U.S. Treasury)
Assets
T-Notes
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collat.)
100
…
"Cash" (term)
Swaps
Swaps …
…
"Cash" (o/n) "Cash" (term)
Banks (retail)
Source: Pozsar (2014)
…
…
…
…
"Cash" (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
Swaps
Swaps
(collat.) < (collat.)
"Cash" (o/n) …
<
FF (o/n)
P-Loans (global)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Dealer Banks (CDS)
…
Equity (temporary)
<
P-Repos (o/n)
…
Risk PM (tactical hedger)
P-Repos (term)
…
Equity
FF (o/n)
Equity (permanent)
Cash PM ("overlay investor")
…
(temporary)
Reserves (o/n) < Private Assets
…
P-Repos ( (term)
Dealer Banks (credit desk)
…
Cash PM (corporations)
…
(collat.) < (collat.)
Equity (permanent)
…
Dealer Banks (IRS and FXS)
P-Bills (term)
T-Notes P-Notes
CDS IRS FXS T-Notes P-Notes
T-Repos (term)
Swaps
…
Type 3:
T-Notes
(uncoll.)
…
(collat.)
"Cash" (o/n)
T-Bills (term)
Risk PM (cash for shorting) Cash
T-Bills (o/n)
T-Repos (term)
Equity (temporary)
Type 2:
Reserves (o/n)
<
…
T-Repos (term)
T-Repos (term)
Sovereign (U.S. Treasury)
Assets
T-Notes
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collat.)
101
…
"Cash" (term)
Swaps
Swaps …
…
"Cash" (o/n) "Cash" (term)
Banks (retail)
…
…
Swap receivs.
…
<
P-Repos (o/n)
…
P-Repos (term)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
Swaps
Swaps …
…
"Cash" (o/n)
…
(collat.) < (collat.)
…
<
FF (o/n)
Equity
P-Loans (global)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
"Cash" (term)
(temporary)
Source: Pozsar (2014)
Public Backstops
Private Backstops Liabilities
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Dealer Banks (CDS)
…
Swap payables
FF (o/n)
Equity (permanent)
Cash PM ("overlay investor")
…
…
Risk PM (tactical hedger)
Private Assets
…
Equity
Reserves (o/n) <
Dealer Banks (credit desk)
…
Cash PM (corporations)
…
(collat.) < (collat.)
Equity (permanent)
…
Dealer Banks (IRS and FXS)
P-Bills (term)
(temporary)
Margin call CDS IRS FXS
T-Repos (term)
Swaps
T-Notes P-Notes
…
Type 3:
T-Notes
(uncoll.)
P-Repos ( (term)
(collat.)
"Cash" (o/n)
T-Bills (term)
Risk PM (cash for shorting) Cash
T-Bills (o/n)
T-Repos (term)
Equity (temporary)
Type 2:
Reserves (o/n)
<
…
T-Repos (term)
T-Repos (term)
Sovereign (U.S. Treasury)
Assets
T-Notes
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collat.)
102
…
Swaps
…
…
…
"Cash" (o/n) "Cash" (term)
Assets
Banks (retail)
Risk PM (tactical hedger)
…
…
Swap receivs.
…
<
P-Repos (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
Swaps
Swaps
…
"Cash" (o/n)
…
(collat.) < (collat.)
…
<
FF (o/n)
Equity
P-Loans (global)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
"Cash" (term)
(temporary)
Source: Pozsar (2014)
Public Backstops
Private Backstops Liabilities
…
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Dealer Banks (CDS)
…
[A]
P-Repos (o/n)
…
P-Repos (o/n)
FF (o/n)
Equity (permanent)
Cash PM ("overlay investor")
…
…
Equity
Private Assets
…
Reserves (o/n) <
Dealer Banks (credit desk)
…
Swaps
(collat.) < (collat.)
Equity (permanent)
Cash PM (corporations)
P-Bills (term)
(temporary)
Cash (margin) CDS IRS FXS
Dealer Banks (IRS and FXS)
Swaps
T-Notes P-Notes
…
Type 3:
"Cash" (term)
(uncoll.)
P-Repos ( (term)
(collat.)
T-Repos (term)
T-Bills (term)
Risk PM (cash for shorting) Cash
"Cash" (o/n)
Equity (temporary)
Type 2:
T-Bills (o/n)
T-Repos (term)
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
<
…
T-Repos (term)
T-Repos (term)
…
T-Notes
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collat.)
103
…
Swaps
…
…
…
"Cash" (o/n) "Cash" (term)
Assets
Banks (retail)
Risk PM (tactical hedger) [A]
…
…
<
P-Repos (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
Banks (wholesale)
Swaps
Swaps
…
"Ca sh" (o/n)
…
(collat.) < (collat.)
Equity
P-Loans (global)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
"Cash" (term)
(temporary)
Source: Pozsar (2014)
Public Backstops
Private Backstops Liabilities
…
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
<
FF (o/n)
"Cash" (term)
…
FF (o/n)
Dealer Banks (CDS)
Swap receivs.
…
[B]
P-Repos (o/n)
Equity (permanent)
Cash PM ("overlay investor")
…
P-Repos (o/n)
FF (o/n) …
…
Equity
Private Assets
…
Reserves (o/n) <
Dealer Banks (credit desk)
…
Swaps
(collat.) < (collat.)
Equity (permanent)
Cash PM (corporations)
P-Bills (term)
(temporary)
Cash (margin) CDS IRS FXS
Dealer Banks (IRS and FXS)
Swaps
T-Notes P-Notes
…
Type 3:
"Cash" (term)
(uncoll.)
P-Repos ( (term)
(collat.)
T-Repos (term)
T-Bills (term)
Risk PM (cash for shorting) Cash
"Cash" (o/n)
Equity (temporary)
Type 2:
T-Bills (o/n)
T-Repos (term)
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
<
…
T-Repos (term)
T-Repos (term)
…
T-Notes
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Type 1:
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Mandate: “Beat benchmark”. Three forms of leverage…
Public Assets
[6] Client-driven money dealing in the DvP repo market.
Central Bank (Federal Reserve)
…
Money dealing:
Cash (collat.)
104
…
Dealer Banks (IRS and FXS) Swaps
Swaps
…
P-Bills (term)
"Cash" (term)
Assets
…
"Cash" (o/n)
…
(collat.) < (collat.)
Banks (retail)
Risk PM (cash for margining)
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
Swaps
Swaps …
…
"Cash" (o/n)
…
(collat.) < (collat.)
…
<
FF (o/n)
Equity
P-Loans (global)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
"Cash" (term)
(temporary)
Source: Pozsar (2014)
Public Backstops
Private Backstops Liabilities
…
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Dealer Banks (CDS)
…
P-Repos (o/n)
FF (o/n)
Equity (permanent)
Cash PM (asset managers)
…
…
Equity
Private Assets
…
(temporary)
Reserves (o/n) <
Dealer Banks (credit desk)
Equity (permanent)
Cash PM (corporations)
Swaps
P-Repos ( (term)
…
"Cash" (term)
(uncoll.)
T-Notes P-Notes
Cash (margin) CDS IRS FXS
T-Repos (term)
T-Bills (term)
Risk PM (cash for shorting) (collat.)
"Cash" (o/n)
Equity (temporary)
Cash
T-Bills (o/n)
T-Repos (term)
T-Notes
Sovereign (U.S. Treasury) Reserves (o/n)
<
…
T-Repos (term)
T-Repos (term)
…
T-Notes
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Public Assets
Money market funding of capital market lending (see Mehrling et al, 2013).
Central Bank (Federal Reserve)
…
Where is the real economy?
Cash (collat.)
105
Risk PM (cash for funding)
Swaps
Swaps …
…
"Cash" (o/n)
…
(collat.) < (collat.)
P-Bills (term)
"Cash" (term)
Banks (retail)
Risk PM (cash for margining)
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans (local)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
Swaps
Swaps …
…
"Cash" (o/n)
…
(collat.) < (collat.)
…
<
FF (o/n)
Equity
P-Loans (global)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
"Cash" (term)
(temporary)
Source: Pozsar (2014)
Public Backstops
Private Backstops Liabilities
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Dealer Banks (CDS)
…
P-Repos (o/n)
FF (o/n)
Equity (permanent)
Cash PM (asset managers)
…
…
Equity
Private Assets
…
(temporary)
Reserves (o/n) <
Dealer Banks (credit desk)
Equity (permanent)
Cash PM (corporations)
Swaps
P-Repos ( (term)
…
T-Bills (o/n)
Dealer Banks (IRS and FXS)
(uncoll.)
T-Notes P-Notes
Cash (margin) CDS IRS FXS
"Cash" (term)
T-Bills (term)
Risk PM (cash for shorting) (collat.)
T-Repos (term)
Equity (temporary)
Cash
Reserves (o/n)
"Cash" (o/n)
…
T-Repos (term)
T-Repos (term)
T-Notes
Sovereign (U.S. Treasury)
Assets
T-Notes (global)
<
…
[1]
T-Repos (term)
…
Public Assets
[1] Funded risk PMs’ securities portfolios,…
Currency Reserves (o/n)
…
T-Notes
Cash PM (reserve managers)
…
Money market funding of capital market lending…
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Where is the real economy?
Cash (collat.)
106
Risk PM (cash for funding)
Swaps
Swaps …
…
"Cash" (o/n)
…
(collat.) < (collat.)
P-Bills (term)
"Cash" (term)
Banks (retail)
Source: Pozsar (2014)
…
…
…
…
…
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Swaps
Swaps
(collat.) < (collat.)
"Cash" (o/n)
P-Loans (global)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
<
FF (o/n)
Dealer Banks (CDS)
…
FF (o/n) [2]
"Cash" (o/n)
…
Equity (temporary)
<
P-Repos (o/n)
P-Loans (local)
Banks (wholesale)
…
P-Repos (o/n)
P-Repos (o/n)
…
Risk PM (cash for margining)
FF (o/n)
Equity (permanent)
Cash PM (asset managers)
…
…
Equity
Private Assets
…
(temporary)
Reserves (o/n) <
Dealer Banks (credit desk)
Equity (permanent)
Cash PM (corporations)
Swaps
P-Repos ( (term)
…
T-Bills (o/n)
Dealer Banks (IRS and FXS)
(uncoll.)
T-Notes P-Notes
Cash (margin) CDS IRS FXS
"Cash" (term)
T-Bills (term)
Risk PM (cash for shorting) (collat.)
T-Repos (term)
Equity (temporary)
Cash
Reserves (o/n)
"Cash" (o/n)
…
T-Repos (term)
T-Repos (term)
T-Notes
Sovereign (U.S. Treasury)
Assets
T-Notes (global)
<
…
[1]
T-Repos (term)
…
Public Assets
[2] Foreign banks’ USD securities portfolios,…
Currency Reserves (o/n)
…
T-Notes
Cash PM (reserve managers)
…
Money market funding of capital market lending…
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Where is the real economy?
Cash (collat.)
107
Risk PM (cash for funding)
Swaps
Swaps …
…
"Cash" (o/n)
…
(collat.) < (collat.)
P-Bills (term)
"Cash" (term)
Banks (retail)
Source: Pozsar (2014)
…
…
…
…
…
"Cash" (o/n)
Deposits (term)
P-Notes
P-Repos (term)
"Cash" (term)
Banks (wholesale)
[2] P-Notes [3] (global)
<
FF (o/n)
Swaps
Swaps
(collat.) < (collat.)
"Cash" (o/n)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Dealer Banks (CDS)
…
Equity (temporary)
<
P-Repos (o/n)
…
…
P-Repos (o/n)
P-Repos (o/n)
…
Risk PM (cash for margining)
FF (o/n)
Equity (permanent)
Cash PM (asset managers)
P-Loans (local)
…
…
Equity
Private Assets
…
(temporary)
Reserves (o/n) <
Dealer Banks (credit desk)
Equity (permanent)
Cash PM (corporations)
Swaps
P-Repos ( (term)
…
T-Bills (o/n)
Dealer Banks (IRS and FXS)
(uncoll.)
T-Notes P-Notes
Cash (margin) CDS IRS FXS
"Cash" (term)
T-Bills (term)
Risk PM (cash for shorting) (collat.)
T-Repos (term)
Equity (temporary)
Cash
Reserves (o/n)
"Cash" (o/n)
…
T-Repos (term)
T-Repos (term)
T-Notes
Sovereign (U.S. Treasury)
Assets
T-Notes (global)
<
…
[1]
T-Repos (term)
…
Public Assets
[3] Large U.S. banks’ securities portfolios,…
Currency Reserves (o/n)
…
T-Notes
Cash PM (reserve managers)
…
Money market funding of capital market lending…
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Where is the real economy?
Cash (collat.)
108
Public Assets
[4] Dealer banks’ securities inventories (net financing). Risk PM (cash for funding)
T-Bills (o/n)
Swaps
Swaps …
…
"Cash" (o/n)
…
(collat.) < (collat.)
P-Bills (term)
"Cash" (term)
Banks (retail)
Source: Pozsar (2014)
…
…
…
…
…
P-Notes (global)
P-Repos (term)
"Cash" (term)
Banks (wholesale)
[2] P-Notes [3] (global)
<
FF (o/n)
Dealer Banks (CDS) Swaps
Swaps
(collat.) < (collat.)
"Cash" (o/n)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
"Cash" (o/n)
…
Equity (temporary)
[4]
<
P-Repos (o/n)
…
…
P-Repos (o/n)
Deposits (term)
P-Repos (o/n)
Equity (permanent)
Cash PM (asset managers)
…
Risk PM (cash for margining)
FF (o/n)
P-Loans (local)
…
…
Equity
Private Assets
…
(temporary)
Reserves (o/n) <
Dealer Banks (credit desk)
Equity (permanent)
Cash PM (corporations)
Swaps
P-Repos ( (term)
…
Dealer Banks (IRS and FXS)
(uncoll.)
T-Notes P-Notes
Cash (margin) CDS IRS FXS
"Cash" (term)
T-Bills (term)
Risk PM (cash for shorting) (collat.)
T-Repos (term)
Equity (temporary)
Cash
Reserves (o/n)
"Cash" (o/n)
…
T-Repos (term)
T-Repos (term)
T-Notes (global)
Sovereign (U.S. Treasury)
Assets
T-Notes (global)
[4]
<
…
[1]
T-Repos (term)
…
Currency Reserves (o/n)
…
T-Notes
Cash PM (reserve managers)
…
Money market funding of capital market lending…
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
Where is the real economy?
Cash (collat.)
109
…
…
…
…
"Cash" (term)
Banks (retail)
Source: Pozsar (2014)
…
P-Notes (global)
P-Repos (term)
"Cash" (term)
Banks (wholesale)
Swaps
Swaps
(collat.) < (collat.)
"Cash" (o/n)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
"Cash" (term)
Public Backstops
Private Backstops Liabilities
…
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
[2] P-Notes [3] (global)
<
FF (o/n)
Dealer Banks (CDS)
…
FF (o/n)
"Cash" (o/n)
…
…
[4]
<
P-Repos (o/n)
…
…
Deposits (term)
P-Repos (o/n)
…
Equity (temporary)
FF (o/n)
Equity (permanent)
Cash PM (asset managers)
…
…
P-Repos (o/n)
Dealer Banks (credit desk)
P-Loans (local)
…
…
Equity
Reserves (o/n) < Private Assets
…
(temporary)
…
"Cash" (o/n)
P-Bills (term)
T-Notes P-Notes
Cash (margin) CDS IRS FXS
Swaps
Swaps
Risk PM (cash for margining) [Ø]
Swaps
(collat.) < (collat.)
Equity (permanent)
Cash PM (corporations)
(uncoll.)
P-Repos ( (term)
(collat.)
"Cash" (term)
T-Bills (term)
Risk PM (cash for shorting) Cash
T-Repos (term)
Dealer Banks (IRS and FXS)
T-Bills (o/n)
"Cash" (o/n)
Equity (temporary)
[Ø]
T-Repos (term)
T-Notes (global)
Sovereign (U.S. Treasury) Reserves (o/n)
<
…
T-Repos (term)
[4]
Assets
T-Notes (global)
T-Repos (term)
…
[1]
Currency Reserves (o/n)
Cash PM (reserve managers)
…
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Public Assets
Most repos are responsible for facilitating price discovery in a market making context, but not funding the real economy directly.
Central Bank (Federal Reserve)
…
Not all repos are equal:
Cash (collat.)
110
…
…
Money Funds (government-only) <
T-CNAVs (o/n)
"Cash" (o/n)
Assets
…
RRPs (o/n) …
T-Bills (o/n)
Banks (retail)
Risk PM (cash for margining)
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
RRPs (o/n)
P-Loans (local)
Deposits (term)
P-Notes (global)
P-Repos (term)
"Cash" (term)
Banks (wholesale)
"Cash" (o/n) …
<
P-CNAVs (o/n)
…
RRPs (o/n)
…
<
FF (o/n)
Equity
P-Notes (global)
Deposits (term)
P-Bills (term)
"Cash" (term)
(temporary)
Source: Pozsar (2014)
Public Backstops
Private Backstops Liabilities
…
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Money Funds (prime)
…
P-Repos (o/n)
FF (o/n)
Equity (permanent)
Cash PM (asset managers)
…
…
Equity
Private Assets
…
(temporary)
Reserves (o/n) <
Dealer Banks (credit desk)
Equity (permanent)
Cash PM (corporations)
"Cash" (term)
P-Repos ( (term)
…
"Cash" (term)
T-Bills (term)
T-Notes P-Notes
Cash (margin) CDS IRS FXS
T-Repos (term)
T-Bills (term)
Risk PM (cash for shorting) (collat.)
T-Notes (global)
Equity (temporary)
Cash
T-Repos (o/n)
Currency Reserves Sovereign (U.S. Treasury) Reserves (o/n)
"Cash" (o/n)
<
…
T-Repos (term)
RRPs (o/n)
…
T-Notes (global)
RRPs (o/n)
Cash PM (reserve managers)
…
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Public Assets
Through RRPs, the Fed will have direct control over haircuts and leverage. Fed haircuts will be the floor.
Central Bank (Federal Reserve)
…
RRPs and risk PMs:
Cash (collat.)
111
…
…
Money Funds (government-only) <
T-CNAVs (o/n)
"Cash" (o/n)
Assets
…
RRPs (o/n) …
T-Bills (o/n)
Banks (retail)
Risk PM (cash for margining)
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
RRPs (o/n)
P-Loans (local)
Deposits (term)
P-Notes (global)
P-Repos (term)
"Cash" (term)
Banks (wholesale)
"Cash" (o/n) …
<
P-CNAVs (o/n)
…
RRPs (o/n)
…
<
FF (o/n)
Equity
P-Notes (global)
Deposits (term)
P-Bills (term)
"Cash" (term)
(temporary)
Source: Pozsar (2014)
Public Backstops
Private Backstops Liabilities
…
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Money Funds (prime)
…
P-Repos (o/n)
FF (o/n)
Equity (permanent)
Cash PM (asset managers)
…
…
Equity
Private Assets
…
(temporary)
Reserves (o/n) <
Dealer Banks (credit desk)
Equity (permanent)
Cash PM (corporations)
"Cash" (term)
P-Repos ( (term)
…
"Cash" (term)
T-Bills (term)
T-Notes P-Notes
Cash (margin) CDS IRS FXS
T-Repos (term)
T-Bills (term)
Risk PM (cash for shorting) (collat.)
T-Notes (global)
Equity (temporary)
Cash
T-Repos (o/n)
Currency Reserves Sovereign (U.S. Treasury) Reserves (o/n)
"Cash" (o/n)
<
…
T-Repos (term)
RRPs (o/n)
…
T-Notes (global)
RRPs (o/n)
Cash PM (reserve managers)
…
Risk PM (cash for funding)
T-Notes
Dealer Banks (government desk)
…
Public Assets
Fed will have control over market-based credit cycles. This will raise the cost of leverage for risk PMs and reduce seclending volumes.
Central Bank (Federal Reserve)
…
RRPs and risk PMs:
Cash (collat.)
112
1. The Hierarchy of Money. 2. The Hierarchy of Access. 3. The Hierarchy of Uses..
4. The Dealer Eco-System. 5. The Macro Perspective. 6. Policy Implications... 113
Public Assets
Albert Einsteinxxxx Risk PM (cash for funding)
Swaps
Swaps
…
P-Bills (term)
"Cash" (term)
Assets
…
"Cash" (o/n)
…
(collat.) < (collat.)
Banks (retail)
Risk PM (cash for margining)
…
…
"Cash" (o/n)
…
<
P-Repos (o/n)
…
P-Repos (o/n)
P-Loans (local)
Deposits (term)
P-Notes (global)
P-Repos (term)
"Cash" (term)
Banks (wholesale)
Swaps
Swaps …
…
"Cash" (o/n)
…
(collat.) < (collat.)
…
<
FF (o/n)
Equity
P-Notes (global)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
"Cash" (term)
(temporary)
Source: Pozsar (2014)
Public Backstops
Private Backstops Liabilities
…
CDS IRS FXS Equity (temporary)
Cash PM (seclenders)
…
FF (o/n)
Dealer Banks (CDS)
…
P-Repos (o/n)
FF (o/n)
Equity (permanent)
Cash PM (asset managers)
…
…
Equity
Private Assets
…
(temporary)
Reserves (o/n) <
Dealer Banks (credit desk)
Equity (permanent)
Cash PM (corporations)
Swaps
P-Repos ( (term)
…
Dealer Banks (IRS and FXS)
(uncoll.)
T-Notes P-Notes
Cash (margin) CDS IRS FXS
"Cash" (term)
T-Bills (term)
Risk PM (cash for shorting) (collat.)
T-Repos (term)
Equity (temporary)
Cash
T-Bills (o/n)
"Cash" (o/n)
T-Notes (global) Sovereign (U.S. Treasury) Reserves (o/n)
T-Repos (term)
…
T-Repos (term)
<
…
T-Notes (global)
T-Repos (term)
…
Currency Reserves (o/n)
Cash PM (reserve managers)
…
T-Notes
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
“If you can’t explain it to a six year old you don’t understand it yourself.”
Cash (collat.)
114
Currency Reserves (o/n)
Public Assets
Albert Einsteinxxxx Risk PM (cash for funding)
Swaps
…
…
P-Bills (term)
Assets
Swaps
Banks (retail)
Risk PM (cash for margining)
…
<
P-Loans (local)
Deposits (term)
P-Notes (global)
P-Repos (term)
Banks (wholesale)
Swaps
Swaps …
Equity
P-Notes (global)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
(temporary)
Source: Pozsar (2014)
(temporary)
(collat.) < (collat.)
…
FF (o/n) …
<
CDS IRS FXS Equity
Dealer Banks (CDS)
…
FF (o/n)
"Cash"
P-Repos (o/n)
…
P-Repos (o/n)
…
P-Repos (o/n)
FF (o/n) …
…
Equity
Cash PM (search for safety)
Dealer Banks (credit desk)
…
…
(temporary)
Reserves (o/n) < Private Assets
P-Repos ( (term)
…
Swaps
(collat.) < (collat.)
(uncoll.)
T-Notes P-Notes
Cash (margin) CDS IRS FXS
T-Bills (o/n)
Dealer Banks (IRS and FXS)
T-Bills (term)
Risk PM (cash for shorting) (collat.)
T-Repos (term)
Equity (temporary)
Cash
T-Notes (global) Sovereign (U.S. Treasury) Reserves (o/n)
T-Repos (term)
…
T-Repos (term)
<
…
T-Notes (global)
T-Repos (term)
…
T-Notes
Dealer Banks (government desk)
…
Central Bank (Federal Reserve)
…
“If you can’t explain it to a six year old you don’t understand it yourself.”
Public Backstops
Private Backstops Liabilities
115
Currency Reserves (o/n)
Public Assets
Albert Einsteinxxxx Risk PM (search for yield)
T-Notes (global)
T-Repos (term)
Sovereign (U.S. Treasury)
Swaps
Swaps
(collat.) < (collat.)
Equity
T-Bills (term)
Swaps (uncoll.)
P-Bills (term)
(temporary)
Assets
…
T-Bills (o/n)
Dealer Banks (IRS and FXS)
…
Reserves (o/n)
T-Repos (term)
…
T-Repos P-Repos
<
…
T-Notes P-Notes CDS IRS FXS
T-Repos (term)
…
T-Notes
Dealer Banks (government desk)
Banks (retail)
Source: Pozsar (2014)
…
…
<
Deposits (term)
P-Notes (global)
P-Repos (term)
Banks (wholesale)
(temporary)
Swaps
Swaps …
(collat.) < (collat.)
…
FF (o/n)
Dealer Banks (CDS)
…
<
CDS IRS FXS Equity
P-Repos (o/n)
…
P-Repos (o/n)
…
FF (o/n)
P-Loans (local)
FF (o/n)
"Cash"
Dealer Banks (credit desk)
…
Private Assets
Reserves (o/n) <
Cash PM (search for safety) …
Central Bank (Federal Reserve)
…
“If you can’t explain it to a six year old you don’t understand it yourself.”
P-Notes (global)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
Public Backstops
Private Backstops Liabilities
116
Currency Reserves (o/n)
Public Assets
Albert Einsteinxxxx Risk PM (search for yield)
Trading inventory
Financing (net)
Sovereign (U.S. Treasury)
Swaps
Swaps
(collat.) < (collat.)
Equity
T-Bills (term)
Swaps (uncoll.)
P-Bills (term)
(temporary)
Assets
…
T-Bills (o/n)
Dealer Banks (IRS and FXS)
…
Reserves (o/n)
Matched books
…
T-Repos P-Repos
<
…
T-Notes P-Notes CDS IRS FXS
Matched books
Banks (retail)
Source: Pozsar (2014)
…
…
<
Deposits (term)
Trading inventory
Financing (net)
Banks (wholesale)
(temporary)
Swaps
Swaps …
(collat.) < (collat.)
…
FF (o/n)
Dealer Banks (CDS)
…
<
CDS IRS FXS Equity
Matched books
…
Matched books
…
FF (o/n)
P-Loans (local)
FF (o/n)
"Cash"
Money Dealers (cash for collateral)
…
Private Assets
Reserves (o/n) <
Cash PM (search for safety) …
T-Notes
Money Dealers (cash for collateral)
…
Central Bank (Federal Reserve)
…
“If you can’t explain it to a six year old you don’t understand it yourself.”
P-Notes (global)
Deposits (term)
Swaps (uncoll.)
P-Bills (term)
Public Backstops
Private Backstops Liabilities
117
Currency Reserves (o/n)
Public Assets
Albert Einsteinxxxx Risk PM (search for yield)
Financing (net)
Risk Dealers (risk for collateral) Matched books
<
Matched books
Equity
T-Bills (term)
Trading inventory
Financing (net)
(temporary)
Assets
…
T-Bills (o/n)
Trading inventory
…
Reserves (o/n)
Matched books
…
T-Repos P-Repos
<
…
T-Notes P-Notes CDS IRS FXS
Sovereign (U.S. Treasury)
Matched books
Banks (retail)
Source: Pozsar (2014)
…
…
<
Deposits (term)
Trading inventory
Financing (net)
Banks (wholesale)
(temporary)
<
Matched books …
Matched books …
FF (o/n)
Risk Dealers (risk for collateral)
…
<
CDS IRS FXS Equity
Matched books
…
Matched books
…
FF (o/n)
P-Loans (local)
FF (o/n)
"Cash"
Money Dealers (cash for collateral)
…
Private Assets
Reserves (o/n) <
Cash PM (search for safety) …
T-Notes
Money Dealers (cash for collateral)
…
Central Bank (Federal Reserve)
…
“If you can’t explain it to a six year old you don’t understand it yourself.”
P-Notes (global)
Deposits (term)
Trading inventory
Financing (net)
Public Backstops
Private Backstops Liabilities
118
Central Bank (Federal Reserve) T-Notes
Currency Reserves (o/n)
Public Assets
Albert Einsteinxxxx Risk PM (search for yield)
Matched books
<
Matched books
Equity
T-Bills (term)
Trading inventory
Financing (net)
(temporary)
Assets
…
T-Bills (o/n)
…
Reserves (o/n)
…
T-Repos P-Repos
Money Dealers (cash for collateral)
…
T-Notes P-Notes CDS IRS FXS
Sovereign (U.S. Treasury)
Banks (retail)
Source: Pozsar (2014)
"Cash"
CDS IRS FXS Equity (temporary)
Risk Dealers (risk for collateral)
…
…
<
Matched books
…
Matched books
…
FF (o/n)
P-Loans (local)
Deposits (term)
Trading inventory
Financing (net)
Banks (wholesale) <
FF (o/n) …
FF (o/n) …
Private Assets
Reserves (o/n) <
Cash PM (search for safety) …
“If you can’t explain it to a six year old you don’t understand it yourself.”
P-Notes (global)
Deposits (term)
Public Backstops
Private Backstops Liabilities
119
“If you can’t explain it to a six year old you don’t understand it yourself.” Albert Einsteinxxxx
<
Matched books …
Matched books …
T-Repos P-Repos …
T-Notes P-Notes CDS IRS FXS
Money Dealers (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) "Cash"
…
Risk PM (search for yield)
CDS IRS FXS Equity (temporary)
Risk Dealers (risk for collateral)
Source: Pozsar (2014)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
120
The dealer eco-system:
<
Matched books
…
Matched books
…
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety)
…
Risk PM (search for yield)
"Cash"
CDS IRS FXS Equity (temporary)
Risk Dealer (risk for collateral)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Source: Mehrling et al (2013) – Bagehot Was a Shadow Banker
121
The dealer eco-system: Risk and cash PMs…
<
Matched books
…
Matched books
…
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety)
…
Risk PM (search for yield)
"Cash"
CDS IRS FXS Equity (temporary)
Risk Dealer (risk for collateral)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Source: Mehrling et al (2013) – Bagehot Was a Shadow Banker
122
The dealer eco-system: Risk and cash PMs and money and risk dealers.
<
Matched books
…
Matched books
…
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety)
…
Risk PM (search for yield)
"Cash"
CDS IRS FXS Equity (temporary)
Risk Dealer (risk for collateral)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Source: Mehrling et al (2013) – Bagehot Was a Shadow Banker
123
The dealer eco-system: Risk and cash PMs and money and risk dealers. Matched book…
<
Matched books
…
Matched books
…
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety)
…
Risk PM (search for yield)
"Cash"
CDS IRS FXS Equity (temporary)
Risk Dealer (risk for collateral)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Source: Mehrling et al (2013) – Bagehot Was a Shadow Banker
124
The dealer eco-system: Risk and cash PMs and money and risk dealers. Matched book and “inventory” (net) positions.
<
Matched books
…
Matched books
…
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety)
…
Risk PM (search for yield)
"Cash"
CDS IRS FXS Equity (temporary)
Risk Dealer (risk for collateral)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Source: Mehrling et al (2013) – Bagehot Was a Shadow Banker
125
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.
<
Matched books
…
Matched books
…
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety)
…
Risk PM (search for yield)
"Cash"
CDS IRS FXS Equity (temporary)
Risk Dealer (risk for collateral)
Source: Pozsar (2014)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
126
Natural complements: Risk PMs repo securities out and cash in. Cash PMs repo cash out and securities in.
<
Matched books
…
Matched books
…
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety)
…
Risk PM (search for yield)
"Cash"
CDS IRS FXS Equity (temporary)
Risk Dealer (risk for collateral)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Securities Out
Securities In
Cash In
Cash Out
Source: Pozsar (2014)
127
The role of collateral: Collateral gives sense of safety for cash lenders. Cash enables risk taking via funding and shorting.
<
Matched books
…
Matched books
…
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety)
…
Risk PM (search for yield)
"Cash"
CDS IRS FXS Equity (temporary)
Risk Dealer (risk for collateral)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Securities Out
Securities In
Cash In
Cash Out
Source: Pozsar (2014)
128
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.
<
Matched books
…
Matched books
…
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety)
…
Risk PM (search for yield)
"Cash"
CDS IRS FXS Equity (temporary)
Risk Dealer (risk for collateral)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Securities Out
Securities In
Cash In
Cash Out
Source: Pozsar (2014)
129
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.
Matched books
<
Matched books
…
DvP
…
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) TRP DvP
…
Risk PM (search for yield)
"Cash"
CDS IRS FXS Equity (temporary)
GCF (inter-dealer) Reverse Repo Transactions
Repo Transactions
$2,446
Total
$2,446
$3,035
Total
$3,035
$463 $1,983
GCF DvP
$463 $1,983
$463 $1,608 $964
GCF TRP DvP
$463 $1,608 $964
-
Net
$589
-
-
-
Securities Out
Securities In
Cash In
Cash Out
Source: Pozsar (2014) and Copeland et al (2012)
130
Money dealing using public bonds by motive: $ trillions 4,000 3,500
3,000
2,500
2,000
1,500
1,000
500
0
Assets
Liabilities
Assets
Q2-07 Secs. In [SI]
RRs [SI]
Secs. Borrowed [SI]
Liabilities Q3-13
Secs. Out [SO]
Source: Haver, Federal Reserve Bank of New York
RPs [SO]
Secs. Loaned [SO]
Balance
131
Money dealing using private bonds by motive: $ trillions 500 450
400
350
300
250
200
150
100
50
0
Assets
Liabilities
Assets
Q2-07 Secs. In [SI]
RRs [SI]
Secs. Borrowed [SI]
Liabilities Q3-13
Secs. Out [SO]
Source: Haver, Federal Reserve Bank of New York
RPs [SO]
Secs. Loaned [SO]
Balance
132
1. The Hierarchy of Money. 2. The Hierarchy of Access. 3. The Hierarchy of Uses..
4. The Dealer Eco-System. 5. The Macro Perspective. 6. Policy Implications... 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. Imbalances (future)
Matched books
<
Matched books …
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) …
Risk PM (search for yield)
…
Macro Drivers (global and local)
Imbalances (present)
"Cash"
Macro Drivers (global and local)
CDS IRS FXS Equity (temporary)
Risk Dealer (risk for collateral)
Source: Pozsar (2014)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Securities Out
Securities In
Cash In
Cash Out 134
Macro imbalances shaping the eco-system: 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”. Imbalances (future)
Matched books
<
Matched books …
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) …
Risk PM (search for yield)
…
Macro Drivers (global and local)
Imbalances (present)
"Cash"
CDS IRS FXS Equity
Macro Drivers (global and local) Managed FX Regimes
(temporary)
Risk Dealer (risk for collateral)
Source: Pozsar (2014)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Securities Out
Securities In
Cash In
Cash Out 135
[1]
Macro imbalances shaping the eco-system: The secular rise of cash PMs has been driven by… [2] the secular rise of corporate profits vs. stagnant wages and capex (see Summers, 2013). Imbalances (future)
Matched books
<
Matched books …
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) …
Risk PM (search for yield)
…
Macro Drivers (global and local)
Imbalances (present)
"Cash"
CDS IRS FXS Equity
Macro Drivers (global and local) Managed FX Regimes Capital vs. Labour
(temporary)
Risk Dealer (risk for collateral)
Source: Pozsar (2014)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Securities Out
Securities In
Cash In
Cash Out 136
[1] [2]
Macro imbalances shaping the eco-system: The secular rise of cash PMs has been driven by… [3] the secular rise of a highly concentrated asset management complex (see OFR, 2013). Imbalances (future)
Matched books
<
Matched books …
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) …
Risk PM (search for yield)
…
Macro Drivers (global and local)
Imbalances (present)
"Cash"
CDS IRS FXS Equity
Macro Drivers (global and local) Managed FX Regimes Capital vs. Labour Cash Pooling (AMX)
(temporary)
Risk Dealer (risk for collateral)
Source: Pozsar (2014)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Securities Out
Securities In
Cash In
Cash Out 137
[1] [2] [3]
Macro imbalances shaping the eco-system: The secular rise of risk PMs has been driven by… [4] the secular rise in underfunded pension promises (see Caballero, 2013). Imbalances (future)
Matched books
<
Matched books
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) …
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
…
[4] Underfunded Pensions
Risk PM (search for yield)
…
Macro Drivers (global and local)
Imbalances (present)
"Cash"
CDS IRS FXS Equity
Macro Drivers (global and local) Managed FX Regimes Capital vs. Labour Cash Pooling (AMX)
(temporary)
Risk Dealer (risk for collateral)
Source: Pozsar (2014)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Securities Out
Securities In
Cash In
Cash Out 138
[1] [2] [3]
Macro imbalances shaping the eco-system: The secular rise of risk PMs has been driven by… [5] the secular rise in FX reserves’ sterilization costs (see Borio et al, 2008). Imbalances (future)
Matched books
<
Matched books
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) …
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
…
[4] Underfunded Pensions [5] Sterilization Costs
Risk PM (search for yield)
…
Macro Drivers (global and local)
Imbalances (present)
"Cash"
CDS IRS FXS Equity
Macro Drivers (global and local) Managed FX Regimes Capital vs. Labour Cash Pooling (AMX)
(temporary)
Risk Dealer (risk for collateral)
Source: Pozsar (2014)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Securities Out
Securities In
Cash In
Cash Out 139
[1] [2] [3]
Macro imbalances shaping the eco-system: The secular rise of risk PMs has been driven by… [6] the secular decline in yields and un-changed return expectations (see BlackRock, 2013). Imbalances (future)
Matched books
<
Matched books
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) …
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
…
[4] Underfunded Pensions [5] Sterilization Costs [6] "Rosy" Expectations
Risk PM (search for yield)
…
Macro Drivers (global and local)
Imbalances (present)
"Cash"
CDS IRS FXS Equity
Macro Drivers (global and local) Managed FX Regimes Capital vs. Labour Cash Pooling (AMX)
(temporary)
Risk Dealer (risk for collateral)
Source: Pozsar (2014)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Securities Out
Securities In
Cash In
Cash Out 140
[1] [2] [3]
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. Imbalances (future)
Matched books
<
Matched books
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) …
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
…
Underfunded Pensions Sterilization Costs "Rosy" Expectations
Risk PM (search for yield)
…
Macro Drivers (global and local)
Imbalances (present)
"Cash"
CDS IRS FXS Equity
Macro Drivers (global and local) Managed FX Regimes Capital vs. Labour Cash Pooling (AMX)
(temporary)
Risk Dealer (risk for collateral)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
CIOs "Meet Liabilities"
Source: Pozsar (2014)
141
Four simple goals that make the eco-system go ‘round: [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. Imbalances (future)
Matched books
<
Matched books
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) …
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
…
Underfunded Pensions Sterilization Costs "Rosy" Expectations
Risk PM (search for yield)
…
Macro Drivers (global and local)
Imbalances (present)
"Cash"
CDS IRS FXS Equity
Macro Drivers (global and local) Managed FX Regimes Capital vs. Labour Cash Pooling (AMX)
(temporary)
Risk Dealer (risk for collateral)
CIOs "Meet Liabilities"
Source: Pozsar (2014)
…
<
Matched books
…
Matched books Trading inventory
Financing (net)
Risk PMs "Beat the Benchmark" 142
Four simple goals that make the eco-system go ‘round: [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. Imbalances (future)
Matched books
<
Matched books
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) …
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
…
Underfunded Pensions Sterilization Costs "Rosy" Expectations
Risk PM (search for yield)
…
Macro Drivers (global and local)
Imbalances (present)
"Cash"
CDS IRS FXS Equity
Macro Drivers (global and local) Managed FX Regimes Capital vs. Labour Cash Pooling (AMX)
(temporary)
Risk Dealer (risk for collateral)
CIOs "Meet Liabilities"
Source: Pozsar (2014)
Risk PMs "Beat the Benchmark"
…
<
Matched books
…
Matched books Trading inventory
Financing (net) Cash PMs "Do Not Lose" 143
Four simple goals that make the eco-system go ‘round: [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. Imbalances (future)
Matched books
<
Matched books
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) …
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
…
Underfunded Pensions Sterilization Costs "Rosy" Expectations
Risk PM (search for yield)
…
Macro Drivers (global and local)
Imbalances (present)
"Cash"
CDS IRS FXS Equity
Macro Drivers (global and local) Managed FX Regimes Capital vs. Labour Cash Pooling (AMX)
(temporary)
Risk Dealer (risk for collateral)
CIOs "Meet Liabilities"
Source: Pozsar (2014)
Risk PMs "Beat the Benchmark"
…
<
Matched books
…
Matched books Trading inventory
Financing (net) Cash PMs "Do Not Lose"
CEOs "Grow" 144
1. The Hierarchy of Money. 2. The Hierarchy of Access. 3. The Hierarchy of Uses..
4. The Dealer Eco-System. 5. The Macro Perspective. 6. Policy Implications... 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. Imbalances (future)
Matched books
<
Matched books
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) …
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
…
Underfunded Pensions Sterilization Costs "Rosy" Expectations
Risk PM (search for yield)
…
Macro Drivers (global and local)
Imbalances (present)
"Cash"
CDS IRS FXS Equity
Macro Drivers (global and local) Managed FX Regimes Capital vs. Labour Cash Pooling (AMX)
(temporary)
Risk Dealer (risk for collateral)
CIOs "Meet Liabilities"
Source: Pozsar (2014)
Risk PMs "Beat the Benchmark"
…
<
Matched books
…
Matched books Trading inventory
Financing (net) Cash PMs "Do Not Lose"
CEOs "Grow" 146
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. Imbalances (future)
Matched books
<
Matched books
Equity
Trading inventory
Financing (net)
(temporary)
Cash PM (search for safety) …
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
Money Dealer (cash for collateral)
…
Underfunded Pensions Sterilization Costs "Rosy" Expectations
Risk PM (search for yield)
…
Macro Drivers (global and local)
Imbalances (present)
"Cash"
CDS IRS FXS Equity
Macro Drivers (global and local) Managed FX Regimes Capital vs. Labour Cash Pooling (AMX)
(temporary)
Risk Dealer (risk for collateral)
CIOs "Meet Liabilities"
Source: Pozsar (2014)
Risk PMs "Beat the Benchmark"
…
<
Matched books
…
Matched books Trading inventory
Financing (net) Cash PMs "Do Not Lose"
CEOs "Grow" 147
Implications for governance:
Level II
Level I
Level II
Level III
G20
?
FSB
?
G20
Macro Drivers (global and local)
Risk PM (search for yield)
Money Dealer (cash for collateral)
Cash PM (search for safety)
Macro Drivers (global and local)
Matched books
<
Matched books …
T-Repos P-Repos
…
T-Notes P-Notes CDS IRS FXS
…
Underfunded Pensions Sterilization Costs "Rosy" Expectations
Equity
Trading inventory
Financing (net)
(temporary)
…
Level III
"Cash"
CDS IRS FXS Equity
Managed FX Regimes Capital vs. Labour Cash Pooling (AMX)
(temporary)
Risk Dealer (risk for collateral)
CIOs "Meet Liabilities"
Source: Pozsar (2014)
Risk PMs "Beat the Benchmark"
…
<
Matched books
…
Matched books Trading inventory
Financing (net) Cash PMs "Do Not Lose"
CEOs "Grow" 148
Conclusions:
A Macro View on Shadow Banking
149
1. Bond portfolios are getting more and more leveraged and bonds are becoming more and more valuable as collateral. 2. Leveraged bond portfolios help asset-liability matching in an ever-lower yield environment and collateral gives cash 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 equitylike returns to help CIOs meet future promises (“theme”).
5. Maturity and liquidity transformation: safe, short-term assets 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 the Fed, and are a first step toward “dealer of last resort”. 150
References:
151
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. 152
Data Appendix:
153
U.S. Chartered Banks: $ billions
12,000
[1]
10,000
[1] [2]
8,000
[2]
6,000
4,000
[3]
[3] 2,000
0 Assets
Liabilities
Assets
Liabilities
Q2-07 Loans
PRBs
PUBs
RRs
FF lent
Q3-13 Reserves
Balance
DDs
SDs
LDs
RPs
Source: Haver, Federal Reserve Z.1, H.8 and author’s calculations
GDF
FF borrowed
154
New York Branches of Foreign Banks: $ billions
2,500
[1]
2,000
1,500
[1]
[2]
[2]
1,000
[3]
[3] 500
[4]
[4] 0 Assets
Liabilities
Assets
Liabilities
Q2-07 Loans
PRBs
PUBs
RRs
FF lent
Q3-13 Reserves
Balance
DDs
SDs
LDs
RPs
Source: Haver, Federal Reserve Z.1, H.8 and author’s calculations
FF borrowed
GDF
155
Dealer Banks’ “Government” Trading Desks: $ billions
3,000
Securities In
Securities Out
Cash Out
Cash In
2,500
[4]
2,000
[3]
1,500
[2]
1,000
[1]
500
0
Assets
Liabilities Q3-13
RR [o/n]
SB [o/n]
RR [< 30]
SB [< 30]
RR [30+]
SB [30+]
SL [o/n]
RP [< 30]
SL [< 30]
RP [30+]
SL [30+]
Net financing
Source: Haver, New York Fed (FR 2004) and author’s calculations
RP [o/n]
156
Dealer Banks’ “Credit” Trading Desks: $ billions
250
Securities In
Securities Out
Cash Out
Cash In
200
[3] 150
100
[2]
50
[1]
0 Assets
Liabilities Q3-13
RR [o/n]
SB [o/n]
RR [term]
SB [term]
RP [o/n]
SL [o/n]
RP [term]
SL [term]
Source: Haver, New York Fed (FR 2004) and author’s calculations
Net financing
157
Government-Only Money Funds: $ billions
1,000
900
800
700
[2] 600
[2]
500
400
300
[1]
200
[1] 100
0 Assets
Liabilities
Assets
2007 Repos
T-Bills
Liabilities January 2014
T-Notes w/ RM < 1 Yr.
Source: Haver, SEC and author’s calculations
GSEs
Other
CNAV [o/n]
158
Prime Money Funds: $ billions
2,000
1,800
[4]
1,600
[4]
1,400
1,200
1,000
[3] [3]
800
600
400
[2] [2]
200
[1]
[1] 0 Assets
Liabilities
Assets
2007 Repos [o/n]
T-Bills
Liabilities
January 2014 T-Notes w/ RM < 1 Yr.
Source: Haver, SEC and author’s calculations
GSEs
LTDs
CP
Other
CNAV [o/n]
159
Mortgage REITs: $ billions
350
300
250
200
150
100
50
0 Assets
Liabilities
Assets
Q2-07
Q3-13 Balance
Source: Haver, Federal Reserve Z.1
Liabilities
Agency RMBS
Repos
160
Offshore Dollar Banking: $ trillions
10
9
8
7
6
5
4
3
2
1
0 Assets
Liabilities Q2-07 Balance
Source: BIS
Assets
Liabilities Q3-13
U.S. dollar assets
U.S. dollar liabilities
161