Precautionary Reserves and the Interbank Market |
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| Authors: | ADAM ASHCRAFT JAMES MCANDREWS DAVID SKEIE |
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| Affiliation: | 1. Adam Ashcraft is Vice President, Credit and Payment Risk Group, Federal Reserve Bank of New York (E‐mail: adam.ashcraft@ny.frb.org).;2. James McAndrews is Executive Vice President and Director of Financial Research, Research and Statistics Group, Federal Reserve Bank of New York (E‐mail: jamie.mcandrews@ny.frb.org).;3. David Skeie is Senior Economist, Research and Statistics Group, Federal Reserve Bank of New York (E‐mail: david.skeie@ny.frb.org). |
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| Abstract: | Extreme disruptions in the interbank market severely hampered the broader financial system during the 2007–08 financial crisis. We use Fedwire data to estimate fed funds trades and track banks’ intraday balances. We show empirical evidence of banks’ precautionary holding of reserves and reluctance to lend linked to documented extreme fed funds rate volatility, including the fed funds rate spiking above the discount rate and crashing to zero. We develop a model of constrained banks that makes new predictions and provides a unified explanation for the stark anomalies during the crisis, our empirical findings, and previous stylized facts from normal times. |
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| Keywords: | D53 E40 G10 G21 excess reserves fed funds rate hoarding liquidity limited participation payments |
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