The Federal Reserve Bank of New York's "Liberty Street Economics blog features a posting entitled, "Foreign Banking Organizations in the United States and the Price of Dollar Liquidity," which tells us, "Foreign banking organizations (FBOs) in the United States play an important role in setting the price of short-term dollar liquidity. In this post, based on remarks given at the 2022 Jackson Hole Economic Policy Symposium, we highlight FBOs' activities in money markets and discuss how the availability of reserve balances affects these activities. Understanding the dynamics of FBOs' business models and their balance sheet constraints helps us monitor the evolution of liquidity conditions during quantitative easing (QE) and tightening (QT) cycles." On "FBOs' Balance Sheets," they comment, "We focus our discussion on the branches and agencies of foreign banks in the United States, excluding foreign subsidiaries. These FBOs have distinct balance sheets compared to U.S. banks, featuring a higher share of reserves, a lower share of deposits, larger positions with overseas affiliates, and overall more flexibility in balance sheet adjustments (see chart). The FBOs are marginal price setters of the price of dollar liquidity in the wholesale funding markets for at least two important reasons. First, they generally do not have access to deposits insured by the Federal Deposit Insurance Corporation (FDIC), so they primarily depend on wholesale funding and capital market borrowing for their dollar needs. Second, the FBOs help intermediate flows of dollar liquidity in the international financial markets to foreign market participants, acting as a key bridge between onshore and offshore dollar funding markets." The blog adds, "Through the lens of FBOs, we have learned that fluctuations in dollar funding conditions crucially depend on the supply of bank reserves and banks' balance sheet constraints. When reserves are ample or abundant, money market rates have downside risks if the supply of reserves is greater than banks' balance sheet space to engage in IOR arbitrage. When reserves are scarce, money market rates have upside risks if the supply of reserves is lower than banks' demand for reserves arising from regulations or risk management motives."

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