How the Financial System Works

How the Financial System Works 1 - A Map of Money Flows in the Global Financial Ecosystem - by Zoltan Pozsar ... money matrix is incomplete. We do not...

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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