Banks’ Balance-Sheet Costs, Monetary Policy, and the ON RRP

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Staff Reports

Banks’ Balance-Sheet Costs, Monetary Policy, and the ON RRP

Number 1041
December 2022 Revised August 2024

JEL classification: G10, G21, E41, E51, E58

Authors: Gara Afonso, Marco Cipriani, and Gabriele La Spada

Using a quasi-natural experiment, we show that quantitative easing (QE) interacts with bank regulation, impacting the size and portfolio choices of non-banks. In 2021, upon the expiration of the Supplementary Leverage Ratio (SLR) relief, banks were incentivized to reduce leverage, shedding deposits and reducing the supply of wholesale debt. We show that as a result, moneymarket funds (MMFs) experienced large inflows and shifted their portfolios toward the Federal Reserve’s ONRRP facility. Our results imply that when non-banks can access the central-bank balance sheet, they end up holding a share of central-bank liabilities, draining reserves and attenuating the impact of QE.

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Author Disclosure Statement(s)

Gara Afonso
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Marco Cipriani
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Gabriele La Spada
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

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