Ok so let’s assume banks increase their deposit rate to avoid capital flight. Is there a possibility they will extend *more* credit in order to maintain profitability? Maybe stuff like that’s shorter duration or variable rate… invoice factoring, equipment leasing.
I guess the larger question is how does the average regional bank solve their profitability problem after they’ve solved their bank run problem?
An interesting question is where do the RRP funds go if access is restricted? There are only 2 real options: a/ Treasury General Account as Treasury issues more bills/bonds or b/ to banks as system reserves. The second pays banks Interest on Reserves of 4.9%, so helps a lot.
That makes sense to me if RRP funds are restricted. Though I do tend to think consumers will learn how to buy a Treasury bill if the spread to their savings account rate remains wide. Water finds the cracks.
I'm still confused about how Fed economist types think about what happens after all that, i.e. how does a BFTP recipient solve their profitability issue.
1/ The post nicely summarises the dynamic, but doesn't make a qualitative judgement as to its impact on bank funding.
2/ The report also shows the beta of deposits to Fed Funds is MUCH lower in this cycle (<25% of previous beta) which means deposit rates are much slower to respond to changes in monetary policy.
3/ There is NO consideration of yield curve inversion - which I deliberately omitted but which is fundamental to the unfairness of RRP rates because MMF can take advantage of closely following monetary target levels, a course not available to banks because it would undermine the entire business model.
Ok so let’s assume banks increase their deposit rate to avoid capital flight. Is there a possibility they will extend *more* credit in order to maintain profitability? Maybe stuff like that’s shorter duration or variable rate… invoice factoring, equipment leasing.
I guess the larger question is how does the average regional bank solve their profitability problem after they’ve solved their bank run problem?
An interesting question is where do the RRP funds go if access is restricted? There are only 2 real options: a/ Treasury General Account as Treasury issues more bills/bonds or b/ to banks as system reserves. The second pays banks Interest on Reserves of 4.9%, so helps a lot.
That makes sense to me if RRP funds are restricted. Though I do tend to think consumers will learn how to buy a Treasury bill if the spread to their savings account rate remains wide. Water finds the cracks.
I'm still confused about how Fed economist types think about what happens after all that, i.e. how does a BFTP recipient solve their profitability issue.
Seems to me BFTP locks in losses - at least until the Fed cuts rates.
New York Fed just posted this article: https://libertystreeteconomics.newyorkfed.org/2023/04/monetary-policy-transmission-and-the-size-of-the-money-market-fund-industry-an-update/
1/ The post nicely summarises the dynamic, but doesn't make a qualitative judgement as to its impact on bank funding.
2/ The report also shows the beta of deposits to Fed Funds is MUCH lower in this cycle (<25% of previous beta) which means deposit rates are much slower to respond to changes in monetary policy.
3/ There is NO consideration of yield curve inversion - which I deliberately omitted but which is fundamental to the unfairness of RRP rates because MMF can take advantage of closely following monetary target levels, a course not available to banks because it would undermine the entire business model.