How Have Banks Been Managing the Composition of High-Quality Liquid Assets?

Jane E. Ihrig, Edward Kim, Ashish Kumbhat, Cindy M. Vojtech and Gretchen Weinbach ()
Additional contact information
Jane E. Ihrig: https://www.federalreserve.gov/econres/jane-e-ihrig.htm
Cindy M. Vojtech: https://www.federalreserve.gov/econres/cindy-m-vojtech.htm

No 2017-092, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study banks' post-crisis liquidity management. We construct time series of U.S. banks' holdings of high-quality liquid assets (HQLA) and examine how these assets have been managed in recent years to comply with the Liquidity Coverage Ratio (LCR) requirement. We find that, in becoming LCR compliant, banks initially ramped up their stock of reserve balances. However, once the requirement was met, some banks subsequently shifted the compositions of their liquid portfolios significantly. This raises the question: What drives the compositions of banks? HQLA? We show that a risk-return framework can account for a range of potential portfolio compositions depending on banks? tolerance for interest rate risk. And, our data indicate that banks have indeed adopted a range of portfolio compositions, with some components exhibiting a high degree of daily variance. These findings lead us to conclude that about half of large banks are largely focused on risk-return conside rations in managing the compositions of their HQLA pools while the other half appear bound by other factors. We highlight the importance of our findings for both the transmission and implementation of monetary policy.

Keywords: HQLA; LCR; bank balance sheets; Liquid assets; Liquidity management; Reserve balances (search for similar items in EconPapers)
JEL-codes: E51 E58 G21 G28 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2017-08-30
New Economics Papers: this item is included in nep-ban, nep-mac, nep-mon and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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https://www.federalreserve.gov/econres/feds/files/2017092r1pap.pdf Revision (application/pdf)
https://www.federalreserve.gov/econres/feds/files/2017092pap.pdf Original (application/pdf)

Related works:
Journal Article: How Have Banks Been Managing the Composition of High-Quality Liquid Assets? (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-92

DOI: 10.17016/FEDS.2017.092r1

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