The future holds various material changes that will impact how banks currently manage liquidity. We have not had an active Fed Funds market since 2008 but we believe it may be about to start up. As rates continue to rise, it might be time to reverse a portion of the Fed’s $2T of liquidity that currently resides on their balance sheet and return another monetary policy lever back to normal.
We are not sure when the Federal Reserve is going to move, but if you play this game, they should do something quick because it is hard to keep the economy between the lines. Armchair FOMC members can now try their hand at a new online game called “Chair the Fed” where central bankers need to adjust the target Fed Funds rate to keep the due mandates of growth and inflation at target levels.
There has never been an economic event that has been talked about for so long and as frequently as the Fed’s likely move tomorrow.
Comedy may run headlong into drama for banks as asset-liability management (ALM) risk may bare its fangs for banks that aren’t careful. It is almost a joke on how much liquidity there is in the system and it would be funnier if banks were not potentially at the butt of the punchline. Unfortunately, for ALM practitioners, this environment is one that we have never seen so its lessons are likely to stick to the ribs of experience for some time.
The Federal Reserve Bank of New York announced this week that it will plan to alter the calculation methodology for the main policy rate in order to include a larger number of transactions. The iconic benchmark federal funds rate, currently calculated by taking the average of overnight brokered trades between banks, will now include trades done (and reported) directly between counterparties.
The Kansas City Fed released an interesting research paper titled The Effect of Risk and Organization Structures on Bank Capital Ratios. The research looks at how risk and a bank’s organizational structure impacts its capital levels. In times of stress, does a bank holding company (BHC) structure help protect a bank or hurt it?
