Reserve Balances, the Federal Funds Market and Arbitrage in the New Regulatory Framework

Ayelen Banegas and Manjola Tase
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Ayelen Banegas: https://www.federalreserve.gov/econres/ayelen-banegas.htm
Manjola Tase: https://www.federalreserve.gov/econres/manjola-tase.htm

No 2016-079, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study developments in reserve balances and the federal funds market in the context of two banking regulatory changes: the widening of the Federal Deposit Insurance Corporation (FDIC) assessment base and the introduction of the Basel III leverage ratio. Using a novel data set that includes FDIC fees and balance sheet data for depository institutions, we find that, as most foreign banks were not subject to the FDIC fee, they absorbed increasing amounts of reserve balances. Furthermore, foreign banks experienced positive and improving conditions for arbitraging between borrowing reserve balances in the federal funds market and earning interest on excess reserves by holding those reserves at the Federal Reserve Banks, contributing to an increase in federal funds borrowing by foreign banks relative to domestic banks. However, the implementation of the Basel III leverage ratio was associated with temporary declines in foreign bank federal funds borrowing at reporting dates.

Keywords: Basel III ratios; FDIC fees; IOER arbitrage; Reserve balances; Federal funds market (search for similar items in EconPapers)
JEL-codes: E49 E52 G28 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2016-09-01
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cba, nep-ias, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-79

DOI: 10.17016/FEDS.2016.079

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