NY Fed Cash Mgmt at Large Banks
The Federal Reserve Bank of New York's research blog, Liberty Street Economics, features the article, "How Do Large Banks Manage Their Money?" Written by Jeffrey Levine and Asani Sarkar, the piece explains, "As the aggregate supply of reserves shrinks and large banks implement liquidity regulations, they may follow a variety of liquidity management strategies depending on their business models and the interest rate differences between alternative liquid instruments. For example, the banks may continue to hold large amounts of excess reserves or shift to Treasury or agency securities or shrink their balance sheets. In this post, we provide new evidence on how large banks have managed their cash, which is the largest component of reserves, on a daily basis since the implementation of liquidity regulations." The piece adds, "Banks primarily hold liquid securities to meet ongoing operational funding needs and cover sudden liquidity needs in periods of stress. A bank's business model determines its services and client relationships and, in turn, its types and amounts of funding.... The Liquidity Coverage Ratio (LCR) requires banks to publicly report their prospective net cash outflows in times of stress over a thirty-day calendar period, by balance sheet category. These quarterly reports provide insight into banks' liquidity management decisions." In conclusion, the articles says, "Why do large U.S. banks hold considerable amounts of low-yielding cash, other than to meet liquidity requirements? Our analysis shows that large banks have a long-run desired cash level and they manage their actual cash balances closely to their desired amounts. However, this desired amount varies over time with the composition of each bank's balance sheet (which in turn is strongly influenced by its business model, more generally), and the opportunity cost of holding cash relative to earning assets."
