Financial Intermediation and Monetary Policy Tobias Adrian and Hyun Song Shin Federal Reserve Bank of New York and Princeton University Central Bank of Argentina Money and Banking Conference August 31‐ September 1, 2009, Buenos Aires The views expressed in this presentation are those of the authors and do not necessarily represent those of the Federal Reserve Bank of New York or the Federal Reserve System.
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Financial Intermediation and Monetary Policy
Tobias Adrian and Hyun Song ShinFederal Reserve Bank of New York and Princeton University
Central Bank of Argentina
Money and Banking ConferenceAugust 31‐ September 1, 2009, Buenos Aires
The views expressed in this presentation are those of the authors and do not necessarily represent those of the Federal Reserve Bank of New York or the Federal Reserve System.
References• Adrian and Shin (2007) “Liquidity and Leverage,” Journal of Financial Intermediation, forthcoming
• Adrian and Shin (2008) “ Financial Intermediaries, Financial Stability, and Monetary Policy,” Jackson Hole Economic Symposium Proceedings, Federal Reserve Bank of Kansas City.
• Adrian and Shin (2009) “Money, Liquidity, and Monetary Policy,” American Economic Review: Papers & Proceedings 2009, 99:2.
• Adrian and Shin (2009) “Prices and Quantities in the Monetary Policy Transmission Mechanism,” International Journal of Central Banking, forthcoming.
• Adrian and Shin (2009) “The Changing Nature of Financial Intermediation and the Financial Crisis of 2007 – 2009,” Annual Reviews, forthcoming.
• Adrian and Shin (2009) “Financial Intermediaries and Monetary Economics,” Handbook of Monetary Economics, forthcoming. 2
Stylized Financial System
ultimate claim holders
ultimateborrowers
Non-financial
firms
govt
Households Households
Pension funds
Insurance companies
Rest of worlddirect credit
Treasury & municipal bonds,corporate bonds, equities
3
Stylized Financial System
ultimate claim holders
ultimateborrowers
Non-financial
firms
govt
Households Households
Pension funds
Insurance companies
Rest of worlddirect credit
Treasury & municipal bonds,corporate bonds, equities
Banking (intermediary)
sectorintermediated
credit
equity
debt claims
depositsfinancial paperMBS, ABS…
mortgagescorporate credit…
4
Market Based and Bank Based Holding of Home Mortgages
5
0
1
2
3
4
5
6
719
80Q
1
1982
Q1
1984
Q1
1986
Q1
1988
Q1
1990
Q1
1992
Q1
1994
Q1
1996
Q1
1998
Q1
2000
Q1
2002
Q1
2004
Q1
2006
Q1
2008
Q1
$ T
rilli
on
0
1
2
3
4
5
6
7
Market-based
Bank-based
Growth of Assets of Four Sectors (March 1954 = 1) (Log scale)
6
1980Q1
1
10
100
1000
1954Q1
1957Q1
1960Q1
1963Q1
1966Q1
1969Q1
1972Q1
1975Q1
1978Q1
1981Q1
1984Q1
1987Q1
1990Q1
1993Q1
1996Q1
1999Q1
2002Q1
2005Q1
2008Q1
Non-financialcorporate
Households
Security BrokerDealers
CommercialBanks
7
Broker‐Dealer Asset Growth and Primary Dealer Repo Growth
-44
-22
0
22
44
-44
-22
0
22
44
1990 1995 2000 2005
Primary Dealer Repo Growth
Annual % Annual %
Source: Board of Governors of the Federal Reserve and Federal Reserve Bank of New York
Security Broker-Dealer Asset Growth
8
Shadow Bank and Commercial Bank Asset Growth
0
5
10
15
20
0
10
20
30
40
1985 1990 1995 2000 2005
Commercial Banks(right axis)
Annual % Annual %
Note: Shadow banks are ABS issuers, finance companies, and funding corporations.Source: Board of Governors of the Federal Reserve
Shadow Banks(left axis)
9
Shadow Bank Asset Growth and Commercial Paper Growth
-40
-20
0
20
40
-20
-10
0
10
20
30
1990 1995 2000 2005
Commercial Paper Outstanding Growth(right axis)
Annual % Annual %
Source: Board of Governors of the Federal Reserve
Shadow Bank Asset Growth(left axis)
Short Term Funding: CP, Repo, M1
500
1000
1500
2000
2500
3000
500
1000
1500
2000
2500
3000
1995 2000 2005
Reverse Repo
Billions of Dollars Billions of Dollars
Source: Federal Reserve Board
Commercial Paper
M1
10
Repos plus CP, and M2
1000
3000
5000
7000
9000
1000
3000
5000
7000
9000
1985 1990 1995 2000 2005
Money Stock M2
Billions of Dollars Billions of Dollars
Source: Board of Governors of the Federal Reserve and Federal Reserve Bank of New York
Primary Dealer Repo plus Commercial Paper Outstanding
11
Credit Demand
• Demand for credit– Investment by households (esp. housing) and non‐financial corporates
– Durable goods consumption (consumer loans)– Demand for financing by central and local governments
• Demand for credit depends on: – Interest rates and spreads– Household and Firm Net worth– Fiscal policy
• Monetary policy works through intermediation– Profitability of intermediation through yield curve– Lender of last resort operations determine availability of funding for intermediaries
– Taylor rule, augmented with the risk appetite factor
• Quantitative policy
Q(GDP, Inflation, Risk Appetite)– Superficial resemblance to monetary aggregate targeting
• Credit Easing (TALF, CPFF, etc.)– Form of by‐pass surgery…
24
By‐pass Surgery
ultimate claim holders
ultimateborrowers
Non-financial
firms
Households
Households
Pension funds
Insurance companies
Banking (intermediary)
sectorvintermediated
credit
equity
debt claims
depositsfinancial paperMBS, ABS…
Blocked artery
Central bank
Excess Reserves
CPFF etc
25
Central Bank Liquidity Backstops
26
• Commercial banks generally have discount window (DW) access and S&Ls have Federal Home Loan Bank funding access.
• However, institutions such as broker‐dealers, shadow banks, money market funds ‐‐‐who often perform bank like maturity and liquidity transformation‐‐‐do not generally have DW access.
• In the past two years, new temporary Federal Reserve 13(3) lending facilities have been introduced by the Federal Reserve to extend liquidity backstops to a broader set of institutions or markets, via :
– PDCF: DW for dealers and indirectly the repo market
– CPFF: backstop to the CP market
– FX swaps: backstop to foreign central banks
– TALF: liquidity provision to securitization markets
Discount Window (DW) and PDCF
27
0
50
100
150
0
50
100
150
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
Discount Window and PDCF BorrowingBillions of Dollars
Source: Federal Reserve Board
DW
Billions of Dollars
Jul 15: 34.46
Jul 15: 0.0
PDCF
Commercial Paper Funding Facility (CPFF)
28
0
200
400
600
1000
1300
1600
1900
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
CPFF and Commercial Paper OutstandingBillions of Dollars