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“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
“…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
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“…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
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Monetary Policy Transmission and the Size of the Money Market Fund Industry: An Update

Gara Afonso, Marco Cipriani et al Federal Reserve Bank of New York

Date Posted:: April 3, 2023

Between April 2022 and January 2023, the AUM of the Money market fund industry increased from $4.31T to $4.62T. Historical lags between rate increases and flows into money market funds suggest that this growth will continue. @NewYorkFed

The size of the MMF industry tracks the monetary policy cycle, albeit with a lag. The chart above shows the assets under management (AUM) of the MMF industry, along with the EFFR and the spread between the MMF yield and the three-month retail CD rate. As the chart shows, the MMF industry did indeed expand following the monetary policy tightening cycles of 2004-08, 2015-18, and 2022 onward. The expansions, however, took place with a lag of one to two years. During the current tightening cycle, MMF yields have increased by 4.13 percentage points, in line with our previous estimate of the beta on MMF shares between 2002 and 2020; in contrast, deposit rates have remained flat. Moreover, consistent with these results, the AUM of the MMF industry has increased as the Federal Reserve has tightened rates, from $4.31 trillion in April 2022 to $4.62 trillion in January 2023. The relatively small magnitude of this increase in the size of the MMF industry, against a rate hike of 4.25 percentage points, is likely due to a lag with which monetary policy affects investor flows in MMFs; the recent monetary policy tightening, in fact, could lead to a further expansion of the MMF industry in the near future.

Takeaways by Macro Roundup^® AI

Money market fund yields rose 4.13 percentage points during the current tightening cycle, in line with the authors' prior estimate of the beta on MMF shares for 2002–2020, while deposit rates remained flat.
Money market fund assets under management rose from $4.31 trillion in April 2022 to $4.62 trillion in January 2023, a modest increase against a 4.25 percentage point rate hike the authors attribute to a lag in investor flows.
The money market fund industry expanded following the tightening cycles of 2004–08, 2015–18, and 2022 onward, with each expansion lagging by one to two years, and the authors suggest recent tightening could bring further expansion.

The Disparate Outcomes of Bank‑ and Nonbank‑Financed Private Credit Expansions

Nina Boyarchenko and Leonardo Elias Federal Reserve Bank of New York

Date Posted:: August 22, 2024
Is Database:: Database

A @NewYorkFed analysis of 33 countries over 1966-2020 finds 1 s.d. higher growth rate in bank credit increases the probability of real GDP growth below -2% in two years’ time by 2.5 percentage points, while nonbank credit has the opposite effect.

Credit extended by the banking and nonbanking sector[s] do not always move together. One type of lending is [often] expanding while the other is contracting, which suggests a substitution between bank and nonbank lending. Overall booms in private credit can be driven by either. We find that bank and nonbank credit expansions predict differentially the downside risk to growth—that is, the probability of extreme negative real GDP growth realizations. The blue line in the chart shows that the likelihood of an extreme negative real GDP growth realization —which we define as year-on-year real GDP growth below -2%— increases following expansions in bank credit for horizons of one to three years, while at the same horizon, growth in nonbank credit actually lowers the probability of a large drop in real GDP growth. In particular, a 1 s.d. Increase in bank credit increases the probability of real GDP growth below -2% in two years’ time by 2.5 ppts relative to a baseline 6% probability in our sample. In contrast, a 1 s.d. higher growth rate in nonbank credit lowers the probability of real GDP growth below -2% in two years’ time by 1.9 ppts.

Takeaways by Macro Roundup^® AI

A 1 standard deviation increase in bank credit growth raises the probability of year-on-year real GDP growth below -2% two years later by 2.5 percentage points, against a 6% baseline probability in the authors' sample.
A 1 standard deviation higher nonbank credit growth lowers the probability of real GDP growth below -2% two years later by 1.9 percentage points, the opposite sign from bank credit expansions at horizons of one to three years.
Bank and nonbank credit do not always move together, with one often expanding while the other contracts, which the authors read as substitution between the two, and private credit booms can be driven by either.

Deposit Insurance, Uninsured Depositors, and Liquidity Risk During Panics

Matthew Jaremski and Steven Sprick Schuster National Bureau of Economic Research

Date Posted:: April 9, 2024
Is Database:: Database

Jaremski and Schuster document that before the establishment of the FDIC, deposits fled to the safety of local insured postal banks, illustrating that lack of universal deposit coverage amplifies run risk. @ssprickschuster

Before the Federal Deposit Insurance Corporation (FDIC) became active in 1934, the only federally insured deposit accounts available to American households were through the U.S. Postal Savings System. To examine the role that postal savings played on bank closure, we collect the balance sheets of over 16,000 commercial banks just before the start of the Great Depression and match them with information on which post offices accepted deposits. We find banks that operated nearby a post office that accepted deposits were more likely to close between 1929 and 1935. The effect of postal savings is severely weakened after deposit insurance was installed across commercial banks in 1934. This lends evidence to the theory that we are capturing a competitive liquidity effect due to the lack of universal coverage.

Takeaways by Macro Roundup^® AI

Matching balance sheets from over 16,000 commercial banks before the Great Depression with post offices that accepted deposits, the authors find banks operating near a deposit-accepting post office were more likely to close between 1929 and 1935.
Before the FDIC became active in 1934, the U.S. Postal Savings System offered the only federally insured deposit accounts available to American households.
The effect of nearby postal savings on bank closure weakened substantially after deposit insurance was extended to commercial banks in 1934, which the authors read as evidence of a competitive liquidity effect stemming from the lack of universal coverage.

The Secular Decline of Bank Balance Sheet Lending

Greg Buchak, Gregor Matvos, Tomasz Piskorski and Amit Seru National Bureau of Economic Research

Date Posted:: April 5, 2024
Is Database:: Database

Bank balance sheet lending has declined from 60% of total private lending in 1970 to 35% in 2023. Private credit is increasingly intermediated through arms-length transactions such as securitization. @NBERpubs

The role of traditional bank-led intermediation has declined sharply since the 1970s. Private credit is increasingly intermediated through arms-length transactions such as securitization. A structural model explores what can explain these shifts [and simulates] implications for macroprudential policies. Declines in securitization cost account for changes in aggregate lending quantities. Savers, rather than borrowers, are the main drivers of bank balance sheet size. Implicit banks’ costs and subsidies explain shifting bank balance sheet composition. Together, these forces explain the fall in the overall share of informationally sensitive bank lending in credit intermediation. Raising capital or liquidity requirements decreases lending in both early (1960s) and recent (2020’s) scenarios, but the effect is less pronounced in the latter. The substitution of bank balance sheet loans with debt securities in response to these policies explains why we observe only a fairly modest decline in aggregate lending despite a large contraction of bank balance sheet lending.

Takeaways by Macro Roundup^® AI

Traditional bank-led credit intermediation has declined sharply since the 1970s, with private credit increasingly intermediated through arms-length transactions such as securitization.
A structural model attributes changes in aggregate lending quantities to declines in securitization costs, bank balance sheet size mainly to savers rather than borrowers, and shifting balance sheet composition to implicit bank costs and subsidies.
Raising capital or liquidity requirements decreases lending in both 1960s and 2020s scenarios, though less markedly in the latter, as substitution of bank balance sheet loans with debt securities limits the decline in aggregate lending.

The Evolution of Banking in the 21st Century: Evidence and Regulatory Implications

Samuel Hanson, Victoria Ivanshina, Laura Nicolae, Jeremy Stein, Adi Sunderam and Daniel Tarullo Brookings Papers On Economic Activity

Date Posted:: April 4, 2024
Is Database:: Database
Is Important:: Important

Deposits – especially uninsured deposits that create run risk – have risen sharply, while banks with the most rapid growth in deposits have shifted assets away from lending towards longer-term MBS and Treasuries. @lauramnicolae

To inform the ongoing discussion of the appropriate regulatory response to [such events as] the failures of three regional banks 2023, we examine trends in the banking industry over the last twenty-five years. On the liability side of bank balance sheets, deposits—and especially uninsured deposits—have grown rapidly. On the asset side, there has been a notable shift away from the information-intensive lending traditionally associated with banks and towards longer-term securities such as MBS and long-term Treasuries. We assess the main regulatory options to reduce the risk of destabilizing bank runs—expanding deposit insurance and strengthening liquidity regulation— and argue that the industry trends we document favor the latter option. Regulators may be more comfortable tightening liquidity requirements on uninsured deposits, insofar as the substantial increase in those deposits in recent decades has not been correlated with an increase in information-intensive lending.

Takeaways by Macro Roundup^® AI

Bank deposits, especially uninsured deposits, have grown rapidly on the liability side of bank balance sheets over the last twenty-five years, according to an examination of banking industry trends.
On the asset side, banks have shifted away from the information-intensive lending traditionally associated with them and toward longer-term securities such as mortgage-backed securities and long-term Treasuries.
Documented industry trends favor strengthening liquidity regulation over expanding deposit insurance to reduce the risk of destabilizing bank runs, since the increase in uninsured deposits has not been correlated with an increase in information-intensive lending.

Manufacturing Demand

Joseph Wang Fed Guy Blog

Date Posted:: March 13, 2024
Is Database:: Database

.@FedGuy12 endorses a proposed adjustment to the Basel III leverage calculations that would increase demand for Treasuries from US banks as future issuances surge.

Banks were huge investors in Treasuries during World War II, but steadily reduced their holdings even as Treasury issuance climbed. The share of bank assets in Treasuries remains historically low as banks have preferred to make loans or invest in higher yielding securities. While banks are required to hold high quality liquid assets, they have chosen to meet those requirements with reserves and Agency MBS rather than Treasuries. A revision to Basel in the form of a revamped leverage calculation would not only boost liquidity across markets, but also potentially make banks significant investors in Treasuries just in time to meet increased future issuance.

Takeaways by Macro Roundup^® AI

Banks' Treasury holdings as a share of bank assets remain historically low, having been steadily reduced from World War II levels even as Treasury issuance climbed.
Banks have preferred making loans or buying higher yielding securities over Treasuries, and have satisfied their high quality liquid asset requirements with reserves and Agency mortgage-backed securities instead.
A revamped leverage calculation under a Basel revision could boost liquidity across markets and potentially make banks significant investors in Treasuries in time to meet increased future issuance.

Monetary Policy and Innovation

Yueran Ma and Kaspar Zimmermann Federal Reserve Bank of Kansas City

Date Posted:: August 29, 2023
Is Database:: Database

Historically monetary tightening has had an impact on risk capital: 100bps of tightening is associated with a 1-3pp decline in R&D spending and a 25% decline in VC investment over the following 1-3 year period.

We normalize the shock to tightening by 100bps. Investment in intellectual property products (IPP) in the national accounts (NIPA) declines by about 1%. The magnitude is comparable to the decline in traditional investment in physical assets. R&D spending in Compustat data for public firms declines by about 3%. VC investment is more volatile, and declines by as much as 25% at a horizon of 1 to 3 years after the monetary policy shock. Patenting in important technologies declines by up to 9% 2 to 4 years after the shock. An aggregate innovation index constructed using estimates of the economic value of patents also declines by up to 9%. Based on estimates of the output and total factor productivity (TFP) sensitivity to the aggregate innovation index, a 9% decline in the index can contribute to 1% lower real output and 0.5% lower TFP 5 years later.

Takeaways by Macro Roundup^® AI

A 100bps monetary tightening shock lowers investment in intellectual property products in the national accounts by about 1%, a magnitude comparable to the decline in traditional physical investment, and cuts R&D spending among Compustat public firms by about 3%.
Venture capital investment is more volatile, declining by as much as 25% one to three years after a 100bps tightening shock, while patenting in important technologies falls by up to 9% two to four years after.
An aggregate innovation index built from estimates of the economic value of patents declines by up to 9%, which, based on estimated output and TFP sensitivities, can contribute to 1% lower real output and 0.5% lower total factor productivity five years later.

Between April 2022 and January 2023, the AUM of the Money market fund industry increased from $4.31T to $4.62T. Historical lags between rate increases and flows into money market funds suggest that this growth will continue. @NewYorkFed

Do money market fund assets grow after interest rate tightening cycles?

Takeaways by Macro Roundup® AI

A @NewYorkFed analysis of 33 countries over 1966-2020 finds 1 s.d. higher growth rate in bank credit increases the probability of real GDP growth below -2% in two years’ time by 2.5 percentage points, while nonbank credit has the opposite effect.

Do bank and nonbank credit booms predict different downside growth risks?

Takeaways by Macro Roundup® AI

Related Articles:

Jaremski and Schuster document that before the establishment of the FDIC, deposits fled to the safety of local insured postal banks, illustrating that lack of universal deposit coverage amplifies run risk. @ssprickschuster

Does incomplete deposit insurance coverage make uninsured banks more likely to fail?

Takeaways by Macro Roundup® AI

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Bank balance sheet lending has declined from 60% of total private lending in 1970 to 35% in 2023. Private credit is increasingly intermediated through arms-length transactions such as securitization. @NBERpubs

Why has bank balance sheet lending declined as a share of credit?

Takeaways by Macro Roundup® AI

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Deposits – especially uninsured deposits that create run risk – have risen sharply, while banks with the most rapid growth in deposits have shifted assets away from lending towards longer-term MBS and Treasuries. @lauramnicolae

Should regulators strengthen liquidity rules rather than expand deposit insurance?

Takeaways by Macro Roundup® AI

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.@FedGuy12 endorses a proposed adjustment to the Basel III leverage calculations that would increase demand for Treasuries from US banks as future issuances surge.

Would changing bank capital rules turn banks into major Treasury buyers?

Takeaways by Macro Roundup® AI

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Historically monetary tightening has had an impact on risk capital: 100bps of tightening is associated with a 1-3pp decline in R&D spending and a 25% decline in VC investment over the following 1-3 year period.

Does monetary tightening reduce research, venture capital, and patenting?

Takeaways by Macro Roundup® AI

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