How the Financial System Works - a Map of Money Flows in the Global Financial Ecosystem

How the Financial System Works - A Map of Money Flows in the Global Financial Ecosystem -

by Zoltan Pozsar Senior Adviser Office of Financial Research, U.S. Treasury

1 An Appendix to the paper “Shadow Banking: The Money View” (Pozsar, 2014) 1. The Hierarchy of Money. 2. The Hierarchy of Access. 3. The Hierarchy of Uses.. 4. The Dealer Eco-System. 5. The Macro Perspective. 6. Policy Implications...

2 Four core institutions: Central Bank (Federal Reserve) Central bank,…

3 Source: Pozsar (2014) Four core institutions: Central Bank (Federal Reserve) Central bank, banks (small and big),…

Banks (retail)

Banks (wholesale)

4 Source: Pozsar (2014) Four core institutions: Central Bank Dealer Banks (Federal Reserve) Central bank, banks (small and big), dealers,…

Banks Dealer Banks (retail)

Banks (wholesale)

5 Source: Pozsar (2014) Four core institutions: Central Bank Dealer Banks (Federal Reserve) Central bank, banks (small and big), dealers and money funds.

Money Funds

Banks Dealer Banks (retail)

Banks Money Funds (wholesale)

6 Source: Pozsar (2014) Four core money claims: Central Bank Dealer Banks (Federal Reserve) Currency,… Currency

Money Funds

Banks Dealer Banks (retail)

Banks Money Funds (wholesale)

7 Source: Pozsar (2014) Liabilities Four core money claims: Central Bank Dealer Banks (Federal Reserve) Currency, deposits,… Currency

Money Funds

Banks Dealer Banks (retail) Deposits (o/n)

Banks Money Funds (wholesale) Deposits (o/n)

8 Source: Pozsar (2014) Liabilities Four core money claims: Central Bank Dealer Banks (Federal Reserve) Currency, deposits, repos,… Currency Repos (o/n)

Money Funds

Banks Dealer Banks (retail) Deposits Repos (o/n) (o/n)

Banks Money Funds (wholesale) Deposits (o/n)

9 Source: Pozsar (2014) Liabilities Four core money claims: Central Bank Dealer Banks (Federal Reserve) Currency, deposits, repos Currency Repos and constant NAV shares. (o/n)

Money Funds

CNAVs (o/n)

Banks Dealer Banks (retail) Deposits Repos (o/n) (o/n)

Banks Money Funds (wholesale) Deposits CNAVs (o/n) (o/n)

10 Source: Pozsar (2014) Liabilities Two categories of assets: Central Bank Dealer Banks (Federal Reserve) Public assets: Currency Repos (o/n) T-Bills – Treasury bills T-Notes – Treasury notes

Money Funds

Public Assets CNAVs (o/n)

Assets Banks Dealer Banks Private assets: (retail) Deposits Repos P-Bills - CD, CP, ECP, etc. (o/n) (o/n) P-Notes - bonds, RMBS, ABS

Banks Money Funds (wholesale)

Private Assets Deposits CNAVs (o/n) (o/n)

11 Source: Pozsar (2014) Liabilities Two categories of assets: Central Bank Dealer Banks (Federal Reserve) Public assets: T-Notes Currency Repos (o/n) T-Bills – Treasury bills T-Notes – Treasury notes

Money Funds

Public Assets CNAVs (o/n)

Assets Banks Dealer Banks Private assets: (retail) Deposits Repos P-Bills - CD, CP, ECP, etc. (o/n) (o/n) P-Notes - bonds, RMBS, ABS

Banks Money Funds (wholesale)

Private Assets Deposits CNAVs (o/n) (o/n)

12 Source: Pozsar (2014) Liabilities Two categories of assets: Central Bank Dealer Banks (Federal Reserve) (government desk) Public assets: T-Notes Currency T-Bills T-Repos (o/n) T-Bills – Treasury bills … T-Notes – Treasury notes T-Notes

T-Repos – Treasury repos Money Funds

Public Assets CNAVs (o/n)

Assets Banks Dealer Banks Private assets: (retail) Deposits Repos P-Bills - CD, CP, ECP, etc. (o/n) (o/n) P-Notes - bonds, RMBS, ABS

Banks Money Funds (wholesale)

Private Assets Deposits CNAVs (o/n) (o/n)

13 Source: Pozsar (2014) Liabilities Two categories of assets: Central Bank Dealer Banks (Federal Reserve) (government desk) Public assets: T-Notes Currency T-Bills T-Repos (o/n) T-Bills – Treasury bills … T-Notes – Treasury notes T-Notes

T-Repos – Treasury repos Money Funds (government-only)

T-CNAVs – Treasury CNAVs Public Assets T-Bills T-CNAVs (o/n)

Assets Banks Dealer Banks Private assets: (retail) Deposits Repos P-Bills - CD, CP, ECP, etc. (o/n) (o/n) P-Notes - bonds, RMBS, ABS

Banks Money Funds (wholesale)

Private Assets Deposits CNAVs (o/n) (o/n)

14 Source: Pozsar (2014) Liabilities Two categories of assets: Central Bank Dealer Banks (Federal Reserve) (government desk) Public assets: T-Notes Currency T-Bills T-Repos (o/n) T-Bills – Treasury bills … T-Notes – Treasury notes T-Notes

T-Repos – Treasury repos Money Funds (government-only)

T-CNAVs – Treasury CNAVs Public Assets T-Bills T-CNAVs (o/n)

Assets Banks Dealer Banks Private assets: (retail) P-Loans Deposits Repos P-Bills - CD, CP, ECP, etc. (o/n) (o/n) P-Notes - bonds, RMBS, ABS

Banks Money Funds (wholesale)

Private Assets Deposits CNAVs (o/n) (o/n)

15 Source: Pozsar (2014) Liabilities Two categories of assets: Central Bank Dealer Banks (Federal Reserve) (government desk) Public assets: T-Notes Currency T-Bills T-Repos (o/n) T-Bills – Treasury bills … T-Notes – Treasury notes T-Notes

T-Repos – Treasury repos Money Funds (government-only)

T-CNAVs – Treasury CNAVs Public Assets T-Bills T-CNAVs (o/n)

Assets Banks Dealer Banks Private assets: (retail) P-Loans Deposits Repos P-Bills - CD, CP, ECP, etc. (o/n) (o/n) P-Notes - bonds, RMBS, ABS

Banks Money Funds (wholesale)

Private Assets P-Notes Deposits CNAVs (o/n) (o/n)

…

P-Loans

16 Source: Pozsar (2014) Liabilities Two categories of assets: Central Bank Dealer Banks (Federal Reserve) (government desk) Public assets: T-Notes Currency T-Bills T-Repos (o/n) T-Bills – Treasury bills … T-Notes – Treasury notes T-Notes

T-Repos – Treasury repos Money Funds (government-only)

T-CNAVs – Treasury CNAVs Public Assets T-Bills T-CNAVs (o/n)

Assets Banks Dealer Banks Private assets: (retail) (credit desk) P-Loans Deposits P-Bills P-Repos P-Bills - CD, CP, ECP, etc. (o/n) (o/n) P-Notes - bonds, RMBS, ABS … P-Notes P-Repos – private repos Banks Money Funds (wholesale)

Private Assets P-Notes Deposits CNAVs (o/n) (o/n)

…

P-Loans

17 Source: Pozsar (2014) Liabilities Two categories of assets: Central Bank Dealer Banks (Federal Reserve) (government desk) Public assets: T-Notes Currency T-Bills T-Repos (o/n) T-Bills – Treasury bills … T-Notes – Treasury notes T-Notes

T-Repos – Treasury repos Money Funds (government-only)

T-CNAVs – Treasury CNAVs Public Assets T-Bills T-CNAVs (o/n)

Private Assets P-Notes Deposits P-Bills P-CNAVs (o/n) (o/n)

…

P-Loans

18 Source: Pozsar (2014) Liabilities Deposits’ special function: Central Bank Dealer Banks (Federal Reserve) (government desk) Banks form the backbone of T-Notes Currency T-Bills T-Repos (o/n)

the payments system and fa- … cilitate the net payments T-Notes (via deposits) of all entities that are lower in the Money Funds system-hierarchy, including (government-only)

Public Assets dealers and money funds. T-Bills T-CNAVs (o/n)

Assets Banks Dealer Banks (retail) (credit desk) P-Loans Deposits P-Bills P-Repos (o/n) (o/n)

…

P-Notes

Banks Money Funds (wholesale) (prime)

Private Assets P-Notes Deposits P-Bills P-CNAVs (o/n) (o/n)

…

P-Loans

19 Source: Pozsar (2014) Liabilities Storing payment surpluses: Central Bank Dealer Banks (Federal Reserve) (government desk) What happens with net pay- T-Notes Currency T-Bills T-Repos (o/n)

ment surpluses at the end of … the day? Through what ins- T-Notes truments are money balances stored within the system? Money Funds (government-only)

Public Assets For every institution, money T-Bills T-CNAVs is something different. (o/n)

This is the intra-system hierarchy of money… Assets Banks Dealer Banks (retail) (credit desk) P-Loans Deposits P-Bills P-Repos (o/n) (o/n)

…

P-Notes

Banks Money Funds (wholesale) (prime)

Private Assets P-Notes Deposits P-Bills P-CNAVs (o/n) (o/n)

…

P-Loans

20 Source: Pozsar (2014) Liabilities Intra-system money hierarchy: Central Bank Dealer Banks (Federal Reserve) (government desk) Reserves at the Fed T-Notes Currency T-Bills T-Repos Reserves (o/n)

are money for banks. … (o/n) T-Notes

Money Funds (government-only)

Public Assets T-Bills T-CNAVs (o/n)

Assets Banks Dealer Banks (retail) (credit desk) Reserves Deposits P-Bills P-Repos (o/n) (o/n) (o/n)

…

… P-Loans P-Notes

Banks Money Funds (wholesale) (prime)

Private Assets Reserves Deposits P-Bills P-CNAVs (o/n) (o/n) (o/n)

… P-Loans

21 Source: Pozsar (2014) Liabilities Intra-system money hierarchy: Central Bank Dealer Banks (Federal Reserve) (government desk) o/n T-Repos with wholesale T-Notes Currency T-Repos T-Repos banks are money for dealers. Reserves (o/n) (o/n)

(o/n) … T-Notes

Money Funds (government-only)

Public Assets T-Bills T-CNAVs (o/n)

Assets Banks Dealer Banks (retail) (credit desk) Reserves Deposits P-Bills P-Repos (o/n) (o/n) (o/n)

…

… P-Loans P-Notes

Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Bills P-CNAVs (o/n) (o/n) (o/n)

… … P-Loans Deposits (o/n)

22 Source: Pozsar (2014) Liabilities Intra-system money hierarchy: Central Bank Dealer Banks (Federal Reserve) (government desk) o/n T-Repos w/ dealers are T-Notes Currency T-Repos T-Repos money for government MFs. Reserves (o/n) (o/n)

(o/n) … T-Notes

Money Funds (government-only)

Public Assets T-Repos T-CNAVs (o/n) (o/n)

… T-Bills

Assets Banks Dealer Banks (retail) (credit desk) Reserves Deposits P-Bills P-Repos (o/n) (o/n) (o/n)

…

… P-Loans P-Notes

Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Bills P-CNAVs (o/n) (o/n) (o/n)

… … P-Loans Deposits (o/n)

23 Source: Pozsar (2014) Liabilities Intra-system money hierarchy: Central Bank Dealer Banks (Federal Reserve) (government desk) o/n P-Repos with dealers T-Notes Currency T-Repos T-Repos are money for prime MFs. Reserves (o/n) (o/n)

(o/n) … T-Notes

Money Funds (government-only)

Public Assets T-Repos T-CNAVs (o/n) (o/n)

… T-Bills

Assets Banks Dealer Banks (retail) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) (o/n) (o/n) (o/n)

… … P-Loans P-Notes

Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) (o/n) (o/n) (o/n)

… … … P-Loans Deposits P-Bills (o/n)

24 Source: Pozsar (2014) Liabilities Central Bank Dealer Banks (Federal Reserve) (government desk) T-Notes Currency T-Repos T-Repos Reserves (o/n) (o/n)

(o/n) … T-Notes

Money Funds (government-only)

Public Assets T-Repos T-CNAVs (o/n) (o/n) ? … T-Bills

Assets Banks Dealer Banks (retail) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) (o/n) (o/n) (o/n)

… … P-Loans P-Notes

Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) (o/n) (o/n) (o/n)

… … … P-Loans Deposits P-Bills (o/n)

25 Source: Pozsar (2014) Liabilities The sovereign as a “bank”: Central Bank Dealer Banks (Federal Reserve) (government desk) Without the sovereign the T-Notes Currency T-Repos T-Repos money matrix is incomplete. Reserves (o/n) (o/n)

(o/n) … T-Notes We do not typically think of her as a bank, but the Sovereign Money Funds sovereign is also capable (U.S. Treasury) (government-only)

Public Assets of absorbing money demand. Reserves T-Bills T-Repos T-CNAVs (o/n) (o/n) (o/n) (o/n)

… T-Bills

Assets Banks Dealer Banks (retail) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) (o/n) (o/n) (o/n)

… … P-Loans P-Notes

Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) (o/n) (o/n) (o/n)

… … … P-Loans Deposits P-Bills (o/n)

26 Source: Pozsar (2014) Liabilities What are money-like claims? Central Bank Dealer Banks (Federal Reserve) (government desk) Par at maturity versus T-Notes Currency T-Repos T-Repos par on demand claims. Reserves (o/n) (o/n)

(o/n) … … T-Notes T-Repos Par at maturity in the (term) near term (o/n < 1 yr). Sovereign Money Funds (U.S. Treasury) (government-only)

Public Assets Breakable and negotiable Reserves T-Bills T-Repos T-CNAVs claims that do not trade (o/n) (o/n) (o/n) (o/n)

… … at par in real time (puts T-Bills T-Bills prior to maturity subject (term) (term) to penalty, market risks). Assets Banks Dealer Banks (retail) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) (o/n) (o/n) (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) (o/n) (o/n) (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

27 Source: Pozsar (2014) Liabilities The alchemy of banking: Central Bank Dealer Banks (Federal Reserve) (government desk) Take more [o/n liquidity], T-Notes Currency T-Repos T-Repos give less [o/n liquidity] Reserves (o/n) < (o/n)

(o/n) … … and put the rest in term… T-Notes T-Repos (term)

Sovereign Money Funds (U.S. Treasury) (government-only)

Public Assets Reserves T-Bills T-Repos T-CNAVs (o/n) (o/n) (o/n) < (o/n)

… … T-Bills T-Bills (term) (term)

Assets Banks Dealer Banks (retail) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

28 Source: Pozsar (2014) Liabilities The alchemy of banking: Central Bank Dealer Banks (Federal Reserve) (government desk) Take more [o/n liquidity], T-Notes Currency T-Repos T-Repos give less [o/n liquidity] Reserves (o/n) < (o/n)

(o/n) … … and put the rest in term… T-Notes T-Repos (term) …this exposes “banks” to Sovereign Money Funds rollover risks, and if (U.S. Treasury) (government-only)

Public Assets there is a run you ask: Reserves T-Bills T-Repos T-CNAVs “do I have enough [o/n] (o/n) (o/n) (o/n) < (o/n)

… … liquidity to survive?”. T-Bills T-Bills (term) (term) Different institutions have different sets of Assets Banks Dealer Banks backups for survival if (retail) (credit desk) Reserves Deposits P-Repos P-Repos o/n liquidity runs out. (o/n) < (o/n) (o/n) < (o/n)

… … … … It is the type and mix of P-Loans Deposits P-Notes P-Repos (term) (term) these backups (or “puts”) that determine the strength Banks Money Funds (wholesale) (prime)

of money claims’ promise of Private Assets Reserves T-Repos P-Repos P-CNAVs at par on demand liquidity. (o / n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

29 Source: Pozsar (2014) Liabilities Hierarchy of liquidity puts: Central Bank Dealer Banks (Federal Reserve) (government desk) Money funds can borrow T-Notes Currency T-Repos T-Repos only limited amounts. Reserves (o/n) < (o/n)

(o/n) … … T-Notes T-Repos If this option is exhausted (term) money funds must sell. Sovereign Money Funds (U.S. Treasury) (funding/market)

Public Assets In a panic, this will likely Reserves T-Bills T-Repos T-CNAVs spiral into a fire sale. (o/n) (o/n) (o/n) < (o/n)

… … T-Bills T-Bills (term) (term)

Assets Banks Dealer Banks (retail) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds (wholesale) (funding/market)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

30 Source: Pozsar (2014) Liabilities Hierarchy of liquidity puts: Central Bank Dealer Banks (Federal Reserve) (funding/market) Dealers have more room to T-Notes Currency T-Repos T-Repos borrow against their assets. Reserves (o/n) < (o/n)

(o/n) … … T-Notes T-Repos If this option is exhausted (term) dealers must sell too. Sovereign Money Funds (U.S. Treasury) (funding/market)

Public Assets In a panic, this will likely Reserves T-Bills T-Repos T-CNAVs spiral into a fire sale too. (o/n) (o/n) (o/n) < (o/n)

… … T-Bills T-Bills (term) (term)

Assets Banks Dealer Banks (retail) (funding/market) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds (wholesale) (funding/market)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

31 Source: Pozsar (2014) Liabilities Hierarchy of liquidity puts: Central Bank Dealer Banks (Federal Reserve) (funding/market) Borrowing against assets and T-Notes Currency T-Repos T-Repos selling assets is access to Reserves (o/n) < (o/n)

(o/n) … … funding and market liquidity. T-Notes T-Repos (term) Funding and market liquidity Sovereign Money Funds are private liquidity puts. (U.S. Treasury) (funding/market)

Public Assets Reserves T-Bills T-Repos T-CNAVs They both depend on private (o/n) (o/n) (o/n) < (o/n)

… … market participants (banks T-Bills T-Bills and dealers) for execution. (term) (term)

Assets Banks Dealer Banks (retail) (funding/market) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds (wholesale) (funding/market)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Private Liquidity Puts 32 Source: Pozsar (2014) Liabilities Hierarchy of liquidity puts: Central Bank Dealer Banks (Federal Reserve) (funding/market) Retail and wholesale banks T-Notes Currency T-Repos T-Repos can borrow against assets or Reserves (o/n) < (o/n)

(o/n) … … put them to the central bank. T-Notes T-Repos (term) Retail and wholesale banks Sovereign Money Funds hardly ever have to sell. (U.S. Treasury) (funding/market)

Public Assets Reserves T-Bills T-Repos T-CNAVs This is access to funding (o/n) (o/n) (o/n) < (o/n)

… … as well as lender of last T-Bills T-Bills resort (LoLR) liquidity. (term) (term)

Assets Banks Dealer Banks (funding/LoLR) (funding/market) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds (funding/LoLR) (funding/market)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Private Liquidity Puts 33 Source: Pozsar (2014) Liabilities Hierarchy of liquidity puts: Central Bank Dealer Banks (Federal Reserve) (funding/market) The sovereign has a monetary T-Notes Currency T-Repos T-Repos backstop (usually a taboo; Reserves (o/n) < (o/n)

(o/n) … … often used during WWI & II T-Notes T-Repos and recently the OMT, see (term) McCulley and Pozsar, 2012). Sovereign Money Funds (monetary backtop) (funding/market)

Public Assets Reserves T-Bills T-Repos T-CNAVs (o/n) (o/n) (o/n) < (o/n)

… … T-Bills T-Bills (term) (term)

Assets Banks Dealer Banks (funding/LoLR) (funding/market) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds (funding/LoLR) (funding/market)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Private Liquidity Puts 34 Source: Pozsar (2014) Liabilities Hierarchy of liquidity puts: Central Bank Dealer Banks (Federal Reserve) (funding/market) LoLR and monetary backstops T-Notes Currency T-Repos T-Repos are public liquidity puts. Reserves (o/n) < (o/n)

(o/n) … … T-Notes T-Repos (term)

Sovereign Money Funds (monetary backtop) (funding/market)

Public Assets Reserves T-Bills T-Repos T-CNAVs (o/n) (o/n) (o/n) < (o/n)

… … T-Bills T-Bills (term) (term)

Assets Banks Dealer Banks (funding/LoLR) (funding/market) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds (funding/LoLR) (funding/market)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Public Liquidity Puts Private Liquidity Puts 35 Source: Pozsar (2014) Liabilities Hierarchy of liquidity puts: Central Bank Dealer Banks (Federal Reserve) (funding/market) LoLR and monetary backstops T-Notes Currency T-Repos T-Repos are public liquidity puts. Reserves (o/n) < (o/n)

(o/n) … … T-Notes T-Repos But official liquidity puts (term) are of value only if one has Sovereign Money Funds the capital to put up the (monetary backtop) (funding/market)

Public Assets haircut at the central bank Reserves T-Bills T-Repos T-CNAVs to borrow the needed funds. (o/n) (o/n) (o/n) < (o/n)

… … T-Bills T-Bills If capital is short the (term) (term) hierarchy of credit puts overrides the hierarchy Assets Banks Dealer Banks of liquidity puts. (funding/LoLR) (funding/market) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds (funding/LoLR) (funding/market)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Public Liquidity Puts Private Liquidity Puts 36 Source: Pozsar (2014) Liabilities Hierarchy of credit puts: Central Bank Dealer Banks (Federal Reserve) T-Bills are guaranteed. T-Notes Currency T-Repos T-Repos Reserves (o/n) < (o/n)

(o/n) … … T-Notes T-Repos (term)

Sovereign Money Funds (guaranteed)

Public Assets Reserves T-Bills T-Repos T-CNAVs (o/n) (o/n) (o/n) < (o/n)

… … T-Bills T-Bills (term) (term)

Assets Banks Dealer Banks

Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

37 Source: Pozsar (2014) Liabilities Hierarchy of credit puts: Central Bank Dealer Banks (Federal Reserve) Deposits are government T-Notes Currency T-Repos T-Repos insured up to $250,000. Reserves (o/n) < (o/n)

(o/n) … … T-Notes T-Repos (term)

Sovereign Money Funds (guaranteed)

Public Assets Reserves T-Bills T-Repos T-CNAVs (o/n) (o/n) (o/n) < (o/n)

… … T-Bills T-Bills (term) (term)

Assets Banks Dealer Banks (insured) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

38 Source: Pozsar (2014) Liabilities Hierarchy of credit puts: Central Bank Dealer Banks (Federal Reserve) Guarantees and insurance T-Notes Currency T-Repos T-Repos are public credit puts. Reserves (o/n) < (o/n)

(o/n) … … T-Notes T-Repos (term)

Sovereign Money Funds (guaranteed)

Public Assets Reserves T-Bills T-Repos T-CNAVs (o/n) (o/n) (o/n) < (o/n)

… … T-Bills T-Bills (term) (term)

Assets Banks Dealer Banks (insured) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Public Credit Puts 39 Source: Pozsar (2014) Liabilities Hierarchy of credit puts: Central Bank Dealer Banks (Federal Reserve) (secured) Repos are secured claims. T-Notes Currency T-Repos T-Repos Reserves (o/n) < (o/n)

(o/n) … … T-Notes T-Repos (term)

Sovereign Money Funds (guaranteed)

Public Assets Reserves T-Bills T-Repos T-CNAVs (o/n) (o/n) (o/n) < (o/n)

… … T-Bills T-Bills (term) (term)

Assets Banks Dealer Banks (insured) (secured) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Public Credit Puts 40 Source: Pozsar (2014) Liabilities Hierarchy of credit puts: Central Bank Dealer Banks (Federal Reserve) (secured) Money fund shares are backed T-Notes Currency T-Repos T-Repos either by secured and guaran- Reserves (o/n) < (o/n)

(o/n) … … teed assets, or secured and T-Notes T-Repos diversified assets. They may (term) also have reputational puts Sovereign Money Funds to their sponsor (weak puts). (guaranteed) (secured/guaranteed)

Public Assets Reserves T-Bills T-Repos T-CNAVs (o/n) (o/n) (o/n) < (o/n)

… … T-Bills T-Bills (term) (term)

Assets Banks Dealer Banks (insured) (secured) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Money Funds Banks (secured/diversified)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Public Credit Puts 41 Source: Pozsar (2014) Liabilities Hierarchy of credit puts: Central Bank Dealer Banks (Federal Reserve) (secured) Collateral, diversification T-Notes Currency T-Repos T-Repos and reputational puts are Reserves (o/n) < (o/n)

(o/n) … … all private credit puts. T-Notes T-Repos (term)

Sovereign Money Funds (guaranteed) (secured/guaranteed)

Public Assets Reserves T-Bills T-Repos T-CNAVs (o/n) (o/n) (o/n) < (o/n)

… … T-Bills T-Bills (term) (term)

Assets Banks Dealer Banks (insured) (secured) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Money Funds Banks (secured/diversified)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Public Credit Puts Private Credit Puts 42 Source: Pozsar (2014) Liabilities Hierarchy of credit puts: Central Bank Dealer Banks (Federal Reserve) (secured) Un-insured deposits are un- T-Notes Currency T-Repos T-Repos secured and un-diversified. Reserves (o/n) < (o/n)

(o/n) … … T-Notes T-Repos (term)

Sovereign Money Funds (guaranteed) (secured/guaranteed)

Public Assets Reserves T-Bills T-Repos T-CNAVs (o/n) (o/n) (o/n) < (o/n)

… … T-Bills T-Bills (term) (term)

Assets Banks Dealer Banks (insured) (secured) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds (un-insured) (secured/diversified)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Public Credit Puts Private Credit Puts 43 Source: Pozsar (2014) Liabilities The hierarchy of money: [1] Purely public money: Central Bank Dealer Banks (Federal Reserve) (government desk) Ability to tax and money creation at will The types of assets and the T-Notes Currency T-Repos T-Repos types of backstops behind Reserves (o/n) < (o/n)

… … money claims yield four T-Notes T-Repos [2] Private-public money: basic categories of money. (term) Explicit liquidity puts from the Fed, and Sovereign Money Funds explicit credit puts from the sovereign Purely public, hybrid and (U.S. Treasury) (government-only) (i.e. the FDIC) on all deposits < $250K.

Public Assets Reserves T-Repos T-CNAVs purely private money claims. T-Bills (o/n) (o/n) < (o/n)

… Purely T-Bills Public [3] Public-private money: public (term) private Implicit official liquidity and credit puts via Treasury collateral involved, Assets Banks Dealer Banks but no direct puts on the liability side. (retail) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) < (o/n)

… Private … … [4] Purely private money: P-Loans public P-Notes P-Repos (term) No official puts, not even implicitly via the collateral involved. Peripheral money Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills Pur ely (term) (term) private

Public Backstops Private Backstops 44 Source: Pozsar (2014) Liabilities The hierarchy of money: [1] Public money: Central Bank Dealer Banks (Federal Reserve) (government desk) Ability to tax and money creation at will The types of assets and the T-Notes Currency T-Repos T-Repos types of backstops behind Reserves (o/n) < (o/n)

… … money claims yield four T-Notes T-Repos [2] Insured money: basic categories of money. (term) Explicit liquidity puts from the Fed, and Sovereign Money Funds explicit credit puts from the sovereign Purely public, hybrid and (U.S. Treasury) (government-only) (i.e. the FDIC) on all deposits < $250K.

Public Assets Reserves T-Repos T-CNAVs purely private money claims. T-Bills (o/n) (o/n) < (o/n)

… Public T-Bills Public [3] Public shadow money: money (term) shadow Implicit official liquidity and credit puts via Treasury collateral involved, Assets Banks Dealer Banks but no direct puts on the liability side. (retail) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) < (o/n)

… Insured … … [4] Private shadow money: P-Loans money P-Notes P-Repos (term) No official puts, not even implicitly via the collateral involved. Peripheral money Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills Private (term) (term) sha dow

Public Backstops Private Backstops 45 Source: Pozsar (2014) Liabilities The hierarchy of money: [1] Public money (M0, or base money): Central Bank Dealer Banks (Federal Reserve) (government desk) Ability to tax and money creation at will The types of assets and the T-Notes Currency T-Repos T-Repos M0 types of backstops behind Reserves (o/n) < (o/n)

… … money claims yield four T-Notes T-Repos [2] Insured money (M1 and M2): basic categories of money. (term) Explicit liquidity puts from the Fed, and Sovereign Money Funds explicit credit puts from the sovereign Purely public, hybrid and (U.S. Treasury) (government-only) (i.e. the FDIC) on all deposits < $250K.

Public Assets Reserves T-Repos T-CNAVs purely private money claims. T-Bills (o/n) (o/n) < (o/n)

… Traditional money supply… Public T-Bills Public [3] Public shadow money: money (term) shadow Implicit official liquidity and credit puts via Treasury collateral involved, Assets Banks Dealer Banks but no direct puts on the liability side. (retail) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) < (o/n)

… Insured M1 … … [4] Private shadow money: P-Loans money M2 P-Notes P-Repos (term) No official puts, not even implicitly via the collateral involved. Peripheral money Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills Private (term) (term) sha dow

Public Backstops Private Backstops 46 Source: Pozsar (2014) Liabilities The hierarchy of money: [1] Public money (M0, or base money): Central Bank Dealer Banks (Federal Reserve) (government desk) Ability to tax and money creation at will The types of assets and the T-Notes Currency T-Repos T-Repos M0 types of backstops behind Reserves (o/n) < (o/n)

Public Assets Reserves T-Repos T-CNAVs purely private money claims. T-Bills (o/n) (o/n) < (o/n)

… Traditional money supply Public T-Bills Public [3] Public shadow money (M3): M3 vs. shadow money supply. money (term) shadow Implicit official liquidity and credit puts via Treasury collateral involved, Assets Banks Dealer Banks but no direct puts on the liability side. (retail) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) < (o/n)

… Insured M1 … … [4] Private shadow money (M3): P-Loans money M2 P-Notes P-Repos (term) No official puts, not even implicitly via the collateral involved. Peripheral money Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs M3 (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills Private M3 (term) (term) sha dow

Public Backstops Private Backstops 47 Source: Pozsar (2014) Liabilities The hierarchy of money: [1] Public money (M0, or base money): Central Bank Dealer Banks (Federal Reserve) (government desk) Ability to tax and money creation at will The types of assets and the T-Notes Currency T-Repos T-Repos M0 types of backstops behind Reserves (o/n) < (o/n)

Public Assets Reserves T-Repos T-CNAVs purely private money claims. T-Bills (o/n) (o/n) < (o/n)

… Traditional money supply Public T-Bills Public [3] Public shadow money (M3): M3 vs. shadow money supply. money (term) shadow Implicit official liquidity and credit puts via Treasury collateral involved, The shadow banking system… Assets Banks Dealer Banks but no direct puts on the liability side. (retail) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) < (o/n)

Private Assets Reserves T-Repos P-Repos P-CNAVs M3 (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills Private M3 (term) (term) sha dow

Public Backstops Private Backstops 48 Source: Pozsar (2014) Liabilities The hierarchy of money: [1] Public money (M0, or base money): Central Bank Dealer Banks (Federal Reserve) (government desk) Ability to tax and money creation at will The types of assets and the T-Notes Currency T-Repos T-Repos M0 types of backstops behind Reserves (o/n) < (o/n)

Public Assets Reserves T-Repos T-CNAVs purely private money claims. T-Bills (o/n) (o/n) < (o/n)

… Traditional money supply Public T-Bills Public [3] Public shadow money (M3): M3 vs. shadow money supply. money (term) shadow Implicit official liquidity and credit puts via Treasury collateral involved, The shadow banking system… Assets Banks Dealer Banks but no direct puts on the liability side. (retail) (credit desk) Reserves Deposits P-Repos P-Repos [1] Public-private subsystem (o/n) < (o/n) < (o/n)

(public collateral, maturity … Insured M1 … … [4] Private shadow money (M3): and liquidity transformation P-Loans money M2 P-Notes P-Repos (term) No official puts, not even implicitly via see Carney and Panetta, 2011) the collateral involved. Peripheral money Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs M3 (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills Private M3 (term) (term) sha dow

Public Backstops Private Backstops 49 Source: Pozsar (2014) Liabilities The hierarchy of money: [1] Public money (M0, or base money): Central Bank Dealer Banks (Federal Reserve) (government desk) Ability to tax and money creation at will The types of assets and the T-Notes Currency T-Repos T-Repos M0 types of backstops behind Reserves (o/n) < (o/n)

Public Assets Reserves T-Repos T-CNAVs purely private money claims. T-Bills (o/n) (o/n) < (o/n)

… Traditional money supply Public T-Bills Public [3] Public shadow money (M3): M3 vs. shadow money supply. money (term) shadow Implicit official liquidity and credit puts via Treasury collateral involved, The shadow banking system… Assets Banks Dealer Banks but no direct puts on the liability side. (retail) (credit desk) Reserves Deposits P-Repos P-Repos [1] Public-private subsystem (o/n) < (o/n) < (o/n)

[2] Purely private subsystemPrivate Assets Reserves T-Repos P-Repos P-CNAVs M3 (private collateral, credit, (o/n) < (o/n) (o/n) < (o/n) maturity and liquidity trafo, … … … P-Loans Deposits P-Bills Private M3 see Pozsar et al, 2010) (term) (term) sha dow

Public Backstops Private Backstops 50 Source: Pozsar (2014) Liabilities Enter the Fed’s RRPs: Central Bank Dealer Banks (Federal Reserve) (government desk) Recall that only banks and T-Notes Currency T-Repos T-Repos M0 the sovereign can have re- Reserves (o/n) < (o/n)

… … serve accounts at the Fed. T-Notes T-Repos (term) For dealers, money is o/n Sovereign Money Funds T-Repos with large banks. (U.S. Treasury) (government-only)

Public Assets Reserves T-Repos T-CNAVs T-Bills For money funds, money is (o/n) (o/n) < (o/n)

… o/n T-Repos with dealers. Public T-Bills Public M3 money (term) shadow No longer… Assets Banks Dealer Banks (retail) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) < (o/n)

… Insured M1 … … P-Loans money M2 P-Notes P-Repos (term)

Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs M3 (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills Private M3 (term) (term) sha dow

Public Backstops Private Backstops 51 Source: Pozsar (2014) Liabilities Enter the Fed’s RRPs: Central Bank Dealer Banks (Federal Reserve) (government desk) RRPs effectively give money T-Notes RRP RRPs T-Repos funds and dealers, the core (o/n) (o/n) < (o/n)

… … entities of the shadow ban- Currency T-Notes T-Repos M0 king system, access to a re- Reserves (term) serve account at the Fed for Sovereign Money Funds the very first time in U.S. (U.S. Treasury) (government-only)

Public Assets Reserves RRPs T-CNAVs monetary history. Do appre- T-Bills ciate the evolutionary sig- (o/n) (o/n) < (o/n)

… nificance of this step and Public T-Bills Public M3 look beyond the view that money (term) shadow the only significance of RRPs is that they will helpAssets Banks Dealer Banks the Fed control short rates. (retail) (credit desk) Reserves Deposits RRPs P-Repos (o/n) < (o/n) < (o/n)

RRPs are likely a station, … Insured M1 … … (more on P-Loans money M2 P-Notes P-Repos not a destination (term) this shortly in Part II). Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos RRPs P-CNAVs M3 (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills Private M3 (term) (term) sha dow

Public Backstops Private Backstops 52 Source: Pozsar (2014) Liabilities Overnight money claims by type: 3,500 $ billions

3,000

2,500

2,000

1,500

1,000

500

0 Public Money Insured Money Private Shadow Money Public Shadow Money Q3-13

Reserves Reverse Repos T-Bills Demand Deposits Dealer Repos [o/n] Securities Loaned CNAVs 53 Source: Federal Reserve Z.1 and H.8, New York Fed (FR 2004), FDIC, U.S. Treasury Term money claims by type: 6,000 $ billions

5,000

4,000

3,000

2,000

1,000

0 Insured Money Public Money Private Shadow Money Public Shadow Money Q3-13

T-Bills T-Notes w/ RM < 1 yr. Small TDs and savings deposits Large TDs Dealer Repos [term] Securities Loaned 54 Source: Federal Reserve Z.1 and H.8, New York Fed (FR 2004) and author’s calculations 1. The Hierarchy of Money. 2. The Hierarchy of Access. 3. The Hierarchy of Uses.. 4. The Dealer Eco-System. 5. The Macro Perspective. 6. Policy Implications...

55 Retail cash investors: Central Bank Dealer Banks (Federal Reserve) (government desk) Mom and pop depositors. T-Notes Currency T-Repos T-Repos Reserves (o/n) < (o/n)

(o/n) … … Holdings of cash and T-Notes T-Repos insured bank deposits. (term)

Sovereign Money Funds (U.S. Treasury) (government-only)

Public Assets Reserves T-Bills T-Repos T-CNAVs (o/n) (o/n) (o/n) < (o/n)

… … T-Bills T-Bills (term) (term)

Assets Banks Dealer Banks (insured) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Public Backstops Private Backstops 56 Source: Pozsar (2014) Liabilities Institutional cash pools: Central Bank Dealer Banks (Federal Reserve) (government desk) At least $10bn in cash AuM T-Notes Currency T-Repos T-Repos (see Pozsar, 2011 and 2012). Reserves (o/n) < (o/n)

(o/n) … … T-Notes T-Repos Cash portfolio managers (PM). (term)

Sovereign Money Funds Mandate: “Do not lose”. (U.S. Treasury) (government-only)

Public Assets Reserves T-Bills T-Repos T-CNAVs Restricted to invest mostly (o/n) (o/n) (o/n) < (o/n)

… … in money market instruments. T-Bills T-Bills (term) (term)

Assets Banks Dealer Banks (retail) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Public Backstops Private Backstops 57 Source: Pozsar (2014) Liabilities Institutional cash pools: Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) At least $10bn in cash AuM T-Notes Currency T-Repos T-Repos "Cash"

(see Pozsar, 2011 and 2012). Reserves (o/n) < (o/n) (o/n) …

(o/n) … … … T-Notes T-Repos "Cash" Equity Cash portfolio managers (PM). (term) (term) (permanent)

Sovereign Money Funds Mandate: “Do not lose”. (U.S. Treasury) (government-only)

Public Assets Reserves T-Bills T-Repos T-CNAVs Restricted to invest mostly (o/n) (o/n) (o/n) < (o/n)

… … in money market instruments. T-Bills T-Bills (term) (term) [1] FX reserve managers’ liquidity tranches. Assets Banks Dealer Banks (retail) (credit desk) Reserves Deposits P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Public Backstops Private Backstops 58 Source: Pozsar (2014) Liabilities Institutional cash pools: Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) At least $10bn in cash AuM T-Notes Currency T-Repos T-Repos "Cash"

(see Pozsar, 2011 and 2012). Reserves (o/n) < (o/n) (o/n) …

(o/n) … … … T-Notes T-Repos "Cash" Equity Cash portfolio managers (PM). (term) (term) (permanent)

Sovereign Money Funds Cash PM Mandate: “Do not lose”. (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

Restricted to invest mostly (o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … in money market instruments. T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent) [1] FX reserve managers’ liquidity tranches. Assets Banks Dealer Banks (retail) (credit desk) Reserves Deposits P-Repos P-Repos [2] Global corporate cash (o/n) < (o/n) (o/n) < (o/n) balances (on and offshore). … … … … P-Loans Deposits P-Notes P-Repos (term) (term)

Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Public Backstops Private Backstops 59 Source: Pozsar (2014) Liabilities Institutional cash pools: Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) At least $10bn in cash AuM T-Notes Currency T-Repos T-Repos "Cash"

(see Pozsar, 2011 and 2012). Reserves (o/n) < (o/n) (o/n) …

(o/n) … … … T-Notes T-Repos "Cash" Equity Cash portfolio managers (PM). (term) (term) (permanent)

Sovereign Money Funds Cash PM Mandate: “Do not lose”. (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

Restricted to invest mostly (o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … in money market instruments. T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent) [1] FX reserve managers’ liquidity tranches. Assets Banks Dealer Banks Cash PM (retail) (credit desk) (asset managers) Global corporate cash Reserves Deposits P-Repos P-Repos "Cash" [2] (o/n) < (o/n) (o/n) < (o/n) (o/n) … balances (on and offshore). … … … … … P-Loans Deposits P-Notes P-Repos "Cash" Equity (term) (term) (term) (temporary) [3] Institutional investors’ pooled cash balances. Banks Money Funds (wholesale) (prime)

Private Assets Reserves T-Repos P-Repos P-CNAVs (o/n) < (o/n) (o/n) < (o/n)

… … … P-Loans Deposits P-Bills (term) (term)

Public Backstops Private Backstops 60 Source: Pozsar (2014) Liabilities Institutional cash pools: Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) At least $10bn in cash AuM T-Notes Currency T-Repos T-Repos "Cash"

(see Pozsar, 2011 and 2012). Reserves (o/n) < (o/n) (o/n) …

(o/n) … … … T-Notes T-Repos "Cash" Equity Cash portfolio managers (PM). (term) (term) (permanent)

Sovereign Money Funds Cash PM Mandate: “Do not lose”. (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

Restricted to invest mostly (o/n) (o/n) (o/n) < (o/n) (o/n) …

Private Assets Reserves T-Repos P-Repos P-CNAVs "Cash" Cash [4] Seclenders’ cash colla- (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral) teral reinvestment accounts. … … … … P-Loans Deposits P-Bills "Cash" (term) (term) (term)

Public Backstops Private Backstops 61 Source: Pozsar (2014) Liabilities Institutional cash pools: 6,000 $ billions

5,000

4,000

3,000

2,000

1,000

0 1997 2000 07Q2 13Q3

Reserve managers Corporations Institutional Investors Securities lenders 62 Source: Federal Reserve Z.1, BIS, ICI and author’s calculations Tough to be safe on scale: [1] Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) [1] Cash pools do not have T-Notes Currency T-Repos T-Repos "Cash" access to M0, M1 or M2. Reserves (o/n) < (o/n) (o/n) …

… … … T-Notes T-Repos "Cash" Equity (term) (term) (permanent)

Sovereign Money Funds Cash PM (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Repos T-CNAVs "Cash" T-Bills

(o/n) (o/n) < (o/n) (o/n) …

… … Public T-Bills "Cash" Equity money (term) (term) (permanent)

[1] Assets Banks Dealer Banks Cash PM (retail) (credit desk) (asset managers) Reserves Deposits P-Repos P-Repos "Cash"

(o/n) < (insured) (o/n) < (o/n) (o/n) …

…

… … … … P-Loans Insured P-Notes P-Repos "Cash" Equity money (term) (term) (temporary)

Banks Money Funds Cash PM (wholesale) (prime) (seclenders)

Private Assets Reserves T-Repos P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (term) (term) (term)

Public Backstops Private Backstops 63 Source: Pozsar (2014) Liabilities Tough to be safe on scale: [1] Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) [1] Cash pools do not have T-Notes Currency T-Repos T-Repos "Cash" access to M0, M1 or M2… Reserves (o/n) < (o/n) (o/n) …

… … … T-Notes T-Repos "Cash" Equity  …for cash pools, money (term) (term) (permanent) begins where M2 ends. Sovereign Money Funds Cash PM (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Repos T-CNAVs "Cash" T-Bills

(o/n) (o/n) < (o/n) (o/n) …

… … Public T-Bills "Cash" Equity money (term) (term) (permanent)

[1] Assets Banks Dealer Banks Cash PM (retail) (credit desk) (asset managers) Reserves Deposits P-Repos P-Repos "Cash"

(o/n) < (insured) (o/n) < (o/n) (o/n) …

…

… … … … P-Loans Insured P-Notes P-Repos "Cash" Equity money (term) (term) (temporary)

Banks Money Funds Cash PM (wholesale) (prime) (seclenders)

Private Assets Reserves T-Repos P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (term) (term) (term)

Public Backstops Private Backstops 64 Source: Pozsar (2014) Liabilities Tough to be safe on scale: [1] Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) [1] Cash pools do not have T-Notes Currency T-Repos T-Repos "Cash" access to M0, M1 or M2. Reserves (o/n) < (o/n) (o/n) …

… … … T-Notes T-Repos "Cash" Equity  For cash pools, money (term) (term) (permanent) begins where M2 ends. [2] Sovereign Money Funds Cash PM (U.S. Treasury) (government-only) (corporations)

Public Assets [2] Cash pools cannot get Reserves T-Bills T-Repos T-CNAVs "Cash" enough U.S. Treasury bills… (o/n) (no t eno ugh ) (o/n) < (o/n) (o/n) …

… … Public T-Bills "Cash" Equity money (term) (term) (permanent)

[1] Assets Banks Dealer Banks Cash PM (retail) (credit desk) (asset managers) Reserves Deposits P-Repos P-Repos "Cash"

(o/n) < (insured) (o/n) < (o/n) (o/n) …

…

… … … … P-Loans Insured P-Notes P-Repos "Cash" Equity money (term) (term) (temporary)

Banks Money Funds Cash PM (wholesale) (prime) (seclenders)

Private Assets Reserves T-Repos P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (term) (term) (term)

Public Backstops Private Backstops 65 Source: Pozsar (2014) Liabilities Tough to be safe on scale: [1] Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) [1] Cash pools do not have T-Notes Currency T-Repos T-Repos "Cash" access to M0, M1 or M2. Reserves (o/n) < (o/n) (o/n) …

… … … T-Notes T-Repos "Cash" Equity  For cash pools, money (term) (term) (permanent) begins where M2 ends. [2] Sovereign Money Funds Cash PM (U.S. Treasury) (government-only) (corporations)

Public Assets [2] Cash pools cannot get Reserves T-Bills T-Repos T-CNAVs "Cash" enough U.S. Treasury bills… (o/n) (no t eno ugh ) (o/n) < (o/n) (o/n) …

… … Public T-Bills "Cash" Equity  …inelastic supply of money (term) (term) (permanent)

public money claims. [1] Assets Banks Dealer Banks Cash PM (retail) (credit desk) (asset managers) Reserves Deposits P-Repos P-Repos "Cash"

(o/n) < (insured) (o/n) < (o/n) (o/n) …

…

… … … … P-Loans Insured P-Notes P-Repos "Cash" Equity money (term) (term) (temporary)

Banks Money Funds Cash PM (wholesale) (prime) (seclenders)

Private Assets Reserves T-Repos P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (term) (term) (term)

Public Backstops Private Backstops 66 Source: Pozsar (2014) Liabilities Tough to be safe on scale: [1] Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) [1] Cash pools do not have T-Notes Currency T-Repos T-Repos "Cash" access to M0, M1 or M2. Reserves (o/n) < (o/n) (o/n) …

… … … T-Notes T-Repos "Cash" Equity  For cash pools, money (term) (term) (permanent) begins where M2 ends. [2] Sovereign Money Funds Cash PM (U.S. Treasury) (government-only) (corporations)

Public Assets [2] Cash pools cannot get Reserves T-Bills T-Repos T-CNAVs "Cash" enough U.S. Treasury bills… (o/n) (no t eno ugh ) (o/n) < (o/n) (o/n) …

… … Public T-Bills "Cash" Equity  …inelastic supply of money (term) (term) (permanent)

public money claims. [1] Assets Banks Dealer Banks Cash PM [3] Cash pools have limits (retail) (credit desk) (asset managers) on un-secured credit risk… Reserves Deposits P-Repos P-Repos "Cash" (o/n) < (insured) (o/n) < (o/n) (o/n) …

…

… … … … P-Loans Insured P-Notes P-Repos "Cash" Equity money (term) (term) (temporary) [3] Banks Money Funds Cash PM (wholesale) (prime) (seclenders)

Private Assets Reserves T-Repos P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (uninsured ) (term) (term)

Public Backstops Private Backstops 67 Source: Pozsar (2014) Liabilities Tough to be safe on scale: [1] Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) [1] Cash pools do not have T-Notes Currency T-Repos T-Repos "Cash" access to M0, M1 or M2. Reserves (o/n) < (o/n) (o/n) …

… … … T-Notes T-Repos "Cash" Equity  For cash pools, money (term) (term) (permanent) begins where M2 ends. [2] Sovereign Money Funds Cash PM (U.S. Treasury) (government-only) (corporations)

Public Assets [2] Cash pools cannot get Reserves T-Bills T-Repos T-CNAVs "Cash" enough U.S. Treasury bills… (o/n) (no t eno ugh ) (o/n) < (o/n) (o/n) …

… … Public T-Bills "Cash" Equity  …inelastic supply of money (term) (term) (permanent)

…

… … … …  …inelastic demand for P-Loans Insured P-Notes P-Repos "Cash" Equity money (term) (term) (temporary) un-insured bank deposits. [3] Banks Money Funds Cash PM (wholesale) (prime) (seclenders)

Private Assets Reserves T-Repos P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (uninsured ) (term) (term)

Public Backstops Private Backstops 68 Source: Pozsar (2014) Liabilities Tough to be safe on scale: [1] [4] Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) [1] Cash pools do not have T-Notes Currency T-Repos T-Repos "Cash" access to M0, M1 or M2. Reserves (o/n) < (o/n) (o/n) …

… … … T-Notes T-Repos "Cash" Equity  For cash pools, money (term) (term) (permanent) begins where M2 ends. [2] Sovereign Money Funds Cash PM (U.S. Treasury) (government-only) (corporations)

Public Assets [2] Cash pools cannot get Reserves T-Bills T-Repos T-CNAVs "Cash" enough U.S. Treasury bills… (o/n) (no t eno ugh ) (o/n) < (o/n) (o/n) …

… … Public T-Bills Public "Cash" Equity  …inelastic supply of money (term) shadow (term) (permanent)

public money claims. [1] [4] Assets Banks Dealer Banks Cash PM [3] Cash pools have limits (retail) (credit desk) (asset managers) on un-secured credit risk… Reserves Deposits P-Repos P-Repos "Cash" (o/n) < (insured) (o/n) < (o/n) (o/n) …

…

[4] Cash pools opt for Private Assets Reserves T-Repos P-Repos P-CNAVs "Cash" Cash second best alternatives… (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills Private "Cash" (uninsured ) (term) sha dow (term)

Public Backstops Private Backstops 69 Source: Pozsar (2014) Liabilities Tough to be safe on scale: [1] [4] Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) [1] Cash pools do not have T-Notes Currency T-Repos T-Repos "Cash" access to M0, M1 or M2. Reserves (o/n) < (o/n) (o/n) …

… … … T-Notes T-Repos "Cash" Equity  For cash pools, money (term) (term) (permanent) begins where M2 ends. [2] Sovereign Money Funds Cash PM (U.S. Treasury) (government-only) (corporations)

Public Assets [2] Cash pools cannot get Reserves T-Bills T-Repos T-CNAVs "Cash" enough U.S. Treasury bills… (o/n) (no t eno ugh ) (o/n) < (o/n) (o/n) …

… … Public T-Bills Public "Cash" Equity  …inelastic supply of money (term) shadow (term) (permanent)

…

[4] Cash pools opt for Private Assets Reserves T-Repos P-Repos P-CNAVs "Cash" Cash second best alternatives… (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills Private "Cash"  …the elastic middle of (uninsured ) (term) sha dow (term) shadow money claims. Public Backstops Private Backstops 70 Source: Pozsar (2014) Liabilities Search for safety vs. yield: [1] [4] Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) Search for yield begins T-Notes Currency T-Repos T-Repos "Cash" where the matrix ends… Reserves (o/n) < (o/n) (o/n) …

… … … T-Notes T-Repos "Cash" Equity (term) (term) (permanent) [2] Sovereign Money Funds Cash PM (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(o/n) (no t eno ugh ) (o/n) < (o/n) (o/n) …

… … Public T-Bills Public "Cash" Equity money (term) shadow (term) (permanent)

[1] [4] Assets Banks Dealer Banks Cash PM (retail) (credit desk) (asset managers) Reserves Deposits P-Repos P-Repos "Cash" Onshore: (o/n) < (insured) (o/n) < (o/n) (o/n) …

…

… … … … [5] CD P-Loans Insured P-Notes P-Repos "Cash" Equity money (term) (term) (temporary) [3] Banks Money Funds Cash PM (wholesale) (prime) (seclenders)

Private Assets Reserves T-Repos P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills Private "Cash" (uninsured ) (term) sha dow (term)

[6] CP Public Backstops Private Backstops 71 Source: Pozsar (2014) Liabilities Search for safety vs. yield: [1] [4] Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) Search for yield begins T-Notes Currency T-Repos T-Repos "Cash" where the matrix ends… Reserves (o/n) < (o/n) (o/n) …

… … … T-Notes T-Repos "Cash" Equity (term) (term) (permanent) [2] Sovereign Money Funds Cash PM (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(o/n) (no t eno ugh ) (o/n) < (o/n) (o/n) …

… … Public T-Bills Public "Cash" Equity money (term) shadow (term) (permanent)

[1] [4] Assets Banks Dealer Banks Cash PM (retail) (credit desk) (asset managers) Reserves Deposits P-Repos P-Repos "Cash" Onshore: Offshore: (o/n) < (insured) (o/n) < (o/n) (o/n) …

…

… … … … [5] CD [7] ECD P-Loans Insured P-Notes P-Repos "Cash" Equity money (term) (term) (temporary) [3] Banks Money Funds Cash PM (wholesale) (prime) (seclenders)

Private Assets Reserves T-Repos P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills Private "Cash" (uninsured ) (term) sha dow (term)

[6] CP [8] ECP Public Backstops Private Backstops 72 Source: Pozsar (2014) Liabilities RRPs and cash pools: [1] [4] Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) Unlike individuals, banks T-Notes RRPs RRPs T-Repos "Cash" and now shadow banks, cash (o/n) (o/n) < (o/n) (o/n) …

… … … pools still do not have a Currency T-Notes T-Repos "Cash" Equity direct access to the Fed’s Reserves (term) (term) (permanent) liabilities (the ultimate [2] Sovereign Money Funds Cash PM form of money, and the sa- (U.S. Treasury) (government-only) (corporations)

Public Assets fest of safe assets around). Reserves T-Bills RRPs T-CNAVs "Cash"

(o/n) (no t eno ugh ) (o/n) < (o/n) (o/n) …

… … That is, corporations and Public T-Bills Public "Cash" Equity asset managers are still money (term) shadow (term) (permanent) constrained to holding [1] [4] mostly shadow money claims.Assets Banks Dealer Banks Cash PM (retail) (credit desk) (asset managers) But the quality of shadow Reserves Deposits RRPs P-Repos "Cash" (o/n) < (insured) (o/n) < (o/n) (o/n) …

… money claims is now much … … … … better because they are P-Loans Insured P-Notes P-Repos "Cash" Equity money (term) (term) (temporary) now backed (at least in [3] part) by something better Banks Money Funds Cash PM (wholesale) (prime) (seclenders)

(RRPs) than ever before. Private Assets Reserves T-Repos RRPs P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills Private "Cash" (uninsured ) (term) sha dow (term)

Public Backstops Private Backstops 73 Source: Pozsar (2014) Liabilities RRPs and cash pools: [1] [4] Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) Consider RRPs potential as T-Notes RRPs RRPs T-Repos "Cash" a macro-prudential tool. (o/n) (o/n) < (o/n) (o/n) …

… … … Currency T-Notes T-Repos "Cash" Equity Required minimum RRP balan- Reserves (term) (term) (permanent) ces for shadow banks could [2] Sovereign Money Funds Cash PM become equivalent to what (U.S. Treasury) (government-only) (corporations)

Public Assets minimum reserve requirements Reserves T-Bills RRPs T-CNAVs "Cash" are for traditional banks. (o/n) (no t eno ugh ) (o/n) < (o/n) (o/n) …

… … Public T-Bills Public "Cash" Equity The implementation of mini- money (term) shadow (term) (permanent) mum RRP balances would in- [1] [4] crease the safety of shadowAssets Banks Dealer Banks Cash PM money claims further still. (retail) (credit desk) (asset managers) Reserves Deposits RRPs P-Repos "Cash"

(o/n) < (insured) (o/n) < (o/n) (o/n) …

…

This could be an evolution- … … … … ary step toward Mehrling’s P-Loans Insured P-Notes P-Repos "Cash" Equity money (term) (term) (temporary) “dealer of last resort” in [3] Bagehot 21st century sense. Banks Money Funds Cash PM (wholesale) (prime) (seclenders) Private Assets Reserves T-Repos RRPs P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills Private "Cash" (uninsured ) (term) sha dow (term)

Public Backstops Private Backstops 74 Source: Pozsar (2014) Liabilities Cash pools’ access to overnight money: 2,500 $ billions

2,000

1,500

1,000

500

0 Private Shadow Money Public Shadow Money Insured Money Public Money Q3-13

Demand Deposits Dealer Repos [o/n] Securities Loaned CNAVs [Institutional Class] T-Bills 75 Source: Haver, Federal Reserve Board, Federal Reserve Bank of New York, FDIC Not all un-insured demand deposits belong to cash pools: 2,500 $ billions Banks with $50 < assets < $100 billion: 4,200 accts., each $2.2 million on avg.

2,000 Banks with assets of over $100 billion: 24,800 accts, each $2.9 million on avg.

1,500

1,000

500

0 Private Shadow Money Public Shadow Money Insured Money Public Money Q3-13

Demand Deposits Dealer Repos [o/n] Securities Loaned CNAVs [Institutional Class] T-Bills 76 Source: Haver, Federal Reserve Board, Federal Reserve Bank of New York, FDIC Cash pools’ access to term money: 2,500 $ billions

2,000

1,500

1,000

500

0 Public Money Private Shadow Money Public Shadow Money Insured Money Q3-13

T-Bills T-Notes w/ RM < 1 yr. Savings and Small TDs Large TDs Dealer Repos [term] Secs. Loaned 77 Source: Haver, Federal Reserve Board, Federal Reserve Bank of New York Not all large time deposits belong to cash pools: 2,500 $ billions We do not know what share of large time deposits belong to cash pools vs. SMEs and the wealthy.

2,000

1,500

1,000

500

0 Public Money Private Shadow Money Public Shadow Money Insured Money Q3-13

T-Bills T-Notes w/ RM < 1 yr. Savings and Small TDs Large TDs Dealer Repos [term] Secs. Loaned 78 Source: Haver, Federal Reserve Board, Federal Reserve Bank of New York 1. The Hierarchy of Money. 2. The Hierarchy of Access. 3. The Hierarchy of Uses.. 4. The Dealer Eco-System. 5. The Macro Perspective. 6. Policy Implications...

79 Money creation: Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) Retail banks create money T-Notes Currency T-Repos T-Repos "Cash" and credit ex nihilo (see Reserves (o/n) < (o/n) (o/n) …

(o/n) … … … for example Turner, 2013). T-Notes T-Repos "Cash" Equity (term) (term) (permanent) Clear links to the real Sovereign Money Funds Cash PM economy through loans. (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent)

Assets Banks Dealer Banks Cash PM (retail) (credit desk) (asset managers) Reserves Deposits P-Repos P-Repos "Cash"

(o/n) < (o/n) (o/n) < (o/n) (o/n) …

…

… … … … … P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

Banks Money Funds Cash PM (wholesale) (prime) (seclenders)

Private Assets Reserves Deposit P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (local) (term) (term) (term)

Public Backstops Private Backstops 80 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) Money dealing is borrowing T-Notes Currency T-Repos T-Repos "Cash" and lending of short-term Reserves (o/n) < (o/n) (o/n) …

(o/n) … … … money in the unsecured and T-Notes T-Repos "Cash" Equity secured and local and global (term) (term) (permanent) (Eurodollar) money markets. Sovereign Money Funds Cash PM (U.S. Treasury) (government-only) (corporations)

Public Assets There are at least six Reserves T-Bills T-Repos T-CNAVs "Cash" forms of money dealing… (o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent)

Assets Banks Dealer Banks Cash PM (retail) (credit desk) (asset managers) Reserves Deposits P-Repos P-Repos "Cash"

(o/n) < (o/n) (o/n) < (o/n) (o/n) …

…

… … … … … P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

Banks Money Funds Cash PM (wholesale) (prime) (seclenders)

Private Assets Reserves Deposit P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (local) (term) (term) (term)

Public Backstops Private Backstops 81 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) [1] Interbank money dealing T-Notes Currency T-Repos T-Repos "Cash" in the federal funds market. Reserves (o/n) < (o/n) (o/n) …

(o/n) … … … T-Notes T-Repos "Cash" Equity (term) (term) (permanent)

Sovereign Money Funds Cash PM (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent)

Assets Banks Dealer Banks Cash PM (retail) (credit desk) (asset managers) Reserves FF P-Repos P-Repos "Cash"

(o/n) < (o/n) (o/n) < (o/n) (o/n) …

…

… … … … … P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

Banks Money Funds Cash PM (wholesale) (prime) (seclenders) Private Assets [1] FF FF P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (local) (term) (term) (term)

Public Backstops Private Backstops 82 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) [1] Interbank money dealing T-Notes Currency [2] T-Repos T-Repos "Cash" in the federal funds market. Reserves (o/n) < (o/n) (o/n) …

(o/n) … … … T-Notes T-Repos "Cash" Equity [2] Interdealer money dea- (term) (term) (permanent) ling in the GCF repo market. Sovereign Money Funds Cash PM (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent)

Assets Banks Dealer Banks Cash PM (retail) (credit desk) (asset managers) Reserves FF P-Repos P-Repos "Cash"

(o/n) < (o/n) (o/n) < (o/n) (o/n) …

…

… … … … … P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

Banks Money Funds Cash PM (wholesale) (prime) (seclenders) Private Assets [1] FF FF P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (local) (term) (term) (term)

Public Backstops Private Backstops 83 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) [1] Interbank money dealing T-Notes Currency [2] T-Repos T-Repos "Cash" in the federal funds market. Reserves (o/n) < (o/n) (o/n) …

Public Assets [3] Interlinked money dea- Reserves T-Bills [3] T-Repos T-CNAVs "Cash" ling in the TRP repo market (o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … (cash PM -> MMF -> dealer). T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent)

Assets Banks Dealer Banks Cash PM (retail) (credit desk) (asset managers) Reserves FF P-Repos P-Repos "Cash"

(o/n) < (o/n) (o/n) < (o/n) (o/n) …

…

… … … … … P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

Banks Money Funds Cash PM (wholesale) (prime) (seclenders) Private Assets [1] FF FF [3] P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (local) (term) (term) (term)

Public Backstops Private Backstops 84 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) [1] Interbank money dealing T-Notes Currency [2] T-Repos T-Repos "Cash" in the federal funds market. Reserves (o/n) < (o/n) (o/n) …

Public Assets [3] Interlinked money dea- Reserves T-Bills [3] T-Repos T-CNAVs "Cash" ling in the TRP repo market (o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … (cash PM -> MMF -> dealer). T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent) [4] Interoffice money dealing via the NY branches Assets Banks Dealer Banks Cash PM of foreign banks, funded (retail) (credit desk) (asset managers) by selling Yankee CD and Reserves FF P-Repos P-Repos "Cash" (o/n) < (o/n) (o/n) < (o/n) (o/n) …

…

CP to prime money funds … … … … … (see Shin, 2011 and 2013). P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

Banks Money Funds Cash PM (wholesale) (prime) (seclenders) Private Assets [1] FF FF [3] P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … [4] P-Loans Deposits P-Bills "Cash" (global) (term) (term) (term)

Public Backstops Private Backstops 85 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM (Federal Reserve) (government desk) (reserve managers) [1] Interbank money dealing T-Notes Currency [2] T-Repos T-Repos "Cash" in the federal funds market. Reserves (o/n) < (o/n) (o/n) …

Public Assets [3] Interlinked money dea- Reserves T-Bills [3] T-Repos T-CNAVs "Cash" ling in the TRP repo market (o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … (cash PM -> MMF -> dealer). T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent) [4] Interoffice money dealing via the NY branches Assets Banks Dealer Banks Cash PM of foreign banks, funded (retail) (credit desk) (asset managers) Reserves FF P-Repos P-Repos "Cash" by selling Yankee CD and (o/n) < (o/n) (o/n) < (o/n) (o/n) …

…

CP to prime money funds … … … … … (see Shin, 2011 and 2013). P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

[5] Crossborder money dea- Banks Money Funds Cash PM (wholesale) (prime) (seclenders)

ling via the headquarters Private Assets [1] FF FF [3] P-Repos P-CNAVs "Cash" Cash of foreign banks selling (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

Eurodollar CD and CP to … … … … … [4] P-Loans Deposits [5] P-Bills P-CNAVs "Cash" prime money market funds. (global) (term) (global) (o/n) (term)

Public Backstops Private Backstops 86 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency [2] T-Repos T-Repos "Cash" Reserves [6] (o/n) < (o/n) (o/n) …

(o/n) … … … T-Notes T-Repos "Cash" Equity (term) (term) (permanent)

Sovereign Money Funds Cash PM (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Bills [3] T-Repos T-CNAVs "Cash"

(o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent)

Assets Banks Dealer Banks Cash PM (retail) (credit desk) (asset managers) Reserves FF [6] P-Repos P-Repos "Cash"

(o/n) < (o/n) (o/n) < (o/n) (o/n) …

…

… … … … … P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

Banks Money Funds Cash PM (wholesale) (prime) (seclenders) Private Assets [1] FF FF [3] P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … [4] P-Loans Deposits [5] P-Bills "Cash" (global) (term) (global) (term)

Public Backstops Private Backstops 87 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (o/n) < (o/n) (o/n) …

(o/n) … … … Dealers’ buy-side clients: T-Notes T-Repos "Cash" Equity risk portfolio managers (PM). (term) (term) (permanent)

Sovereign Money Funds Cash PM Risk PM (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent)

Assets Banks Dealer Banks Cash PM Risk PM (retail) (credit desk) (asset managers) Reserves FF P-Repos P-Repos "Cash"

(o/n) < (o/n) (o/n) < (o/n) (o/n) …

… … … … … P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

Banks Money Funds Cash PM Risk PM (wholesale) (prime) (seclenders)

Private Assets FF FF P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (global) (term) (global) (term)

Public Backstops Private Backstops 88 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (o/n) < (o/n) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Sovereign Money Funds Cash PM Risk PM (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent)

Assets Banks Dealer Banks Cash PM Risk PM (retail) (credit desk) (asset managers) Reserves FF P-Repos P-Repos "Cash"

(o/n) < (o/n) (o/n) < (o/n) (o/n) …

… … … … … P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

Banks Money Funds Cash PM Risk PM (wholesale) (prime) (seclenders)

Private Assets FF FF P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (global) (term) (global) (term)

Public Backstops Private Backstops 89 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (o/n) < (o/n) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Money Funds Cash PM Type 1: (cash for funding) (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent)

Assets Banks Dealer Banks Cash PM Risk PM (retail) (credit desk) (asset managers) Reserves FF P-Repos P-Repos "Cash"

(o/n) < (o/n) (o/n) < (o/n) (o/n) …

… … … … … P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

Banks Money Funds Cash PM Risk PM (wholesale) (prime) (seclenders)

Private Assets FF FF P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (global) (term) (global) (term)

Public Backstops Private Backstops 90 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (o/n) < (o/n) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Money Funds Cash PM Type 1: (cash for funding) (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent)

Type 2: Risk PM Assets Banks Dealer Banks Cash PM (cash for shorting) (retail) (credit desk) (asset managers) Reserves FF P-Repos P-Repos "Cash"

(o/n) < (o/n) (o/n) < (o/n) (o/n) …

… … … … … P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

Banks Money Funds Cash PM Risk PM (wholesale) (prime) (seclenders)

Private Assets FF FF P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (global) (term) (global) (term)

Public Backstops Private Backstops 91 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (o/n) < (o/n) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Money Funds Cash PM Type 1: (cash for funding) (U.S. Treasury) (government-only) (corporations)

Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … T-Bills T-Bills "Cash" Equity (term) (term) (term) (permanent)

Type 2: Risk PM Assets Banks Dealer Banks Cash PM (cash for shorting) (retail) (credit desk) (asset managers) Reserves FF P-Repos P-Repos "Cash"

(o/n) < (o/n) (o/n) < (o/n) (o/n) …

… … … … … P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

Type 3: Risk PM Banks Money Funds Cash PM (cash for margining) (wholesale) (prime) (seclenders)

Private Assets FF FF P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (global) (term) (global) (term)

Public Backstops Private Backstops 92 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Money Funds Cash PM Type 1: (M-REIT) (U.S. Treasury) (government-only) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(RMBS) (term) (o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … … Equity T-Bills T-Bills "Cash" Equity (temporary) (term) (term) (term) (permanent)

Type 2: Risk PM Assets Banks Dealer Banks Cash PM (cash for shorting) (retail) (credit desk) (asset managers) Reserves FF P-Repos P-Repos "Cash"

(o/n) < (o/n) (o/n) < (o/n) (o/n) …

… … … … … P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

Type 3: Risk PM Banks Money Funds Cash PM (cash for margining) (wholesale) (prime) (seclenders)

Private Assets FF FF P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (global) (term) (global) (term)

Public Backstops Private Backstops 93 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Money Funds Cash PM Type 1: (cash for funding) (U.S. Treasury) (government-only) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(term) (o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … … Equity T-Bills T-Bills "Cash" Equity (temporary) (term) (term) (term) (permanent)

Type 2: Risk PM Assets Banks Dealer Banks Cash PM ("real money") (retail) (credit desk) (short seller) T-Notes Equity Reserves FF P-Repos P-Repos "Cash"

P-Notes (temporary) (o/n) < (o/n) (o/n) < (o/n) (o/n) …

… … … … … P-Loans Deposits P-Notes P-Repos "Cash" Equity (local) (term) (term) (term) (temporary)

Type 3: Risk PM Banks Money Funds Cash PM (cash for margining) (wholesale) (prime) (seclenders)

Private Assets FF FF P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (global) (term) (global) (term)

Public Backstops Private Backstops 94 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Money Funds Cash PM Type 1: (cash for funding) (U.S. Treasury) (government-only) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(term) (o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … … Equity T-Bills T-Bills "Cash" Equity (temporary) (term) (term) (term) (permanent)

Type 2: Risk PM Assets Banks Dealer Banks Cash PM (seclender) (retail) (credit desk) (short seller) Cash P-Repos [A] Reserves FF P-Repos P-Repos P-Repos Shorts (collat.) ( (term) (o/n) < (o/n) (term) < (o/n) (o/n) (P-Notes)

… … … … … … … … T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (term) (term) (temporary)

Type 3: Risk PM Banks Money Funds Cash PM (cash for margining) (wholesale) (prime) (seclenders)

Private Assets FF FF P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collateral)

… … … … P-Loans Deposits P-Bills "Cash" (global) (term) (global) (term)

Public Backstops Private Backstops 95 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Money Funds Cash PM Type 1: (cash for funding) (U.S. Treasury) (government-only) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(term) (o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … … Equity T-Bills T-Bills "Cash" Equity (temporary) (term) (term) (term) (permanent)

… … … … … … … T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (term) (term) (temporary)

Type 3: Risk PM Banks Money Funds Cash PM (cash for margining) (wholesale) (prime) (seclenders)

Private Assets FF FF P-Repos P-CNAVs "Cash" Cash (o/n) < (o/n) (o/n) < (o/n) (o/n) (collat.)

[B] … … … … P-Loans Deposits P-Bills "Cash" (global) (term) (global) (term)

Public Backstops Private Backstops 96 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Money Funds Cash PM Type 1: (cash for funding) (U.S. Treasury) (government-only) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills T-Repos T-CNAVs "Cash"

(term) (o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … … Equity T-Bills T-Bills "Cash" Equity (temporary) (term) (term) (term) (permanent)

Type 2: Risk PM Assets Banks Dealer Banks Cash PM (cash for shorting) (retail) (credit desk) ("overlay investor") Cash P-Repos Reserves FF P-Repos P-Repos "Cash" CDS (collat.) ( (term) (o/n) < (o/n) (term) < (o/n) (o/n) IRS

… … … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (term) (term) (temporary)

Type 3: Risk PM Banks Money Funds Cash PM (tactical hedger) (wholesale) (prime) (seclenders)

CDS Private Assets FF FF P-Repos P-CNAVs "Cash" Cash

IRS … (o/n) < (o/n) (o/n) < (o/n) (o/n) (collat.)

FXS … … … … T-Notes Equity P-Loans Deposits P-Bills "Cash" P-Notes (temporary) (global) (term) (global) (term)

Public Backstops Private Backstops 97 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Cash PM Type 1: (cash for funding) (U.S. Treasury) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills "Cash"

(term) (o/n) (o/n) (o/n) …

… … … Equity T-Bills "Cash" Equity (temporary) (term) (term) (permanent)

… … … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (term) (term) (temporary)

Type 3: Risk PM Banks Cash PM (tactical hedger) (wholesale) (seclenders)

CDS Private Assets FF FF "Cash" Cash

IRS … (o/n) < (o/n) (o/n) (collat.)

FXS … … … T-Notes Equity P-Loans Deposits "Cash" P-Notes (temporary) (global) (term) (term)

Public Backstops Private Backstops 98 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Dealer Banks Cash PM Type 1: (cash for funding) (U.S. Treasury) (IRS and FXS) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills Swaps Swaps "Cash"

(term) (o/n) (o/n) (collat.) < (collat.) (o/n) …

… … … … … Equity T-Bills Swaps P-Bills "Cash" Equity (temporary) (term) (uncoll.) (term) (term) (permanent)

… … … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (term) (term) (temporary)

Type 3: Risk PM Banks Dealer Banks Cash PM (tactical hedger) (wholesale) (CDS) (seclenders)

CDS Private Assets FF FF Swaps Swaps "Cash" Cash

IRS … (o/n) < (o/n) (collat.) < (collat.) (o/n) (collat.)

FXS … … … … … T-Notes Equity P-Loans Deposits Swaps P-Bills "Cash" P-Notes (temporary) (global) (term) (uncoll.) (term) (term)

Public Backstops Private Backstops 99 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Dealer Banks Cash PM Type 1: (cash for funding) (U.S. Treasury) (IRS and FXS) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills Swaps Swaps "Cash"

(term) (o/n) (o/n) (collat.) < (collat.) (o/n) …

… … … … … Equity T-Bills Swaps P-Bills "Cash" Equity (temporary) (term) (uncoll.) (term) (term) (permanent)

… … … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (term) (term) (temporary)

Type 3: Risk PM Banks Dealer Banks Cash PM (tactical hedger) (wholesale) (CDS) (seclenders)

CDS Private Assets FF FF Swaps Swaps "Cash" Cash

IRS … (o/n) < (o/n) (collat.) < (collat.) (o/n) (collat.)

FXS … … … … … T-Notes Equity P-Loans Deposits Swaps P-Bills "Cash" P-Notes (temporary) (global) (term) (uncoll.) (term) (term)

Public Backstops Private Backstops 100 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Dealer Banks Cash PM Type 1: (cash for funding) (U.S. Treasury) (IRS and FXS) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills Swaps Swaps "Cash"

(term) (o/n) (o/n) (collat.) < (collat.) (o/n) …

… … … … … Equity T-Bills Swaps P-Bills "Cash" Equity (temporary) (term) (uncoll.) (term) (term) (permanent)

… … … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (term) (term) (temporary)

Type 3: Risk PM Banks Dealer Banks Cash PM (tactical hedger) (wholesale) (CDS) (seclenders)

CDS Private Assets FF FF Swaps Swaps "Cash" Cash

IRS … (o/n) < (o/n) (collat.) < (collat.) (o/n) (collat.)

FXS … … … … … T-Notes Equity P-Loans Deposits Swaps P-Bills "Cash" P-Notes (temporary) (global) (term) (uncoll.) (term) (term)

Public Backstops Private Backstops 101 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Dealer Banks Cash PM Type 1: (cash for funding) (U.S. Treasury) (IRS and FXS) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills Swaps Swaps "Cash"

(term) (o/n) (o/n) (collat.) < (collat.) (o/n) …

… … … … … Equity T-Bills Swaps P-Bills "Cash" Equity (temporary) (term) (uncoll.) (term) (term) (permanent)

Type 2: Risk PM Assets Banks Dealer Banks Cash PM (cash for shorting) (retail) (credit desk) ("overlay investor") Cash P-Repos Reserves FF P-Repos P-Repos Swap CDS (collat.) ( (term) (o/n) < (o/n) (term) < (o/n) receivs. IRS

… … … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (term) (term) (temporary)

Type 3: Risk PM Banks Dealer Banks Cash PM (tactical hedger) (wholesale) (CDS) (seclenders)

Margin Swap Private Assets FF FF Swaps Swaps "Cash" Cash call payables (o/n) < (o/n) (collat.) < (collat.) (o/n) (collat.)

CDS … … … … … … … IRS Equity P-Loans Deposits Swaps P-Bills "Cash" FXS (temporary) (global) (term) (uncoll.) (term) (term)

Public Backstops Private Backstops 102 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Dealer Banks Cash PM Type 1: (cash for funding) (U.S. Treasury) (IRS and FXS) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills Swaps Swaps "Cash"

(term) (o/n) (o/n) (collat.) < (collat.) (o/n) …

… … … … … Equity T-Bills Swaps P-Bills "Cash" Equity (temporary) (term) (uncoll.) (term) (term) (permanent)

… … … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (term) (term) (temporary)

Type 3: Risk PM Banks Dealer Banks Cash PM (tactical hedger) (wholesale) (CDS) (seclenders) [A] Cash P-Repos Private Assets FF FF Swaps Swaps "Cash" Cash (margin) (o/n) (o/n) < (o/n) (collat.) < (collat.) (o/n) (collat.)

CDS … … … … … … … IRS Equity P-Loans Deposits Swaps P-Bills "Cash" FXS (temporary) (global) (term) (uncoll.) (term) (term)

Public Backstops Private Backstops 103 Source: Pozsar (2014) Liabilities Money dealing: Central Bank Dealer Banks Cash PM [6] Client-driven money dea- (Federal Reserve) (government desk) (reserve managers) ling in the DvP repo market. T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … Mandate: “Beat benchmark”. T-Notes T-Repos "Cash" Equity Three forms of leverage… (term) (term) (permanent)

Risk PM Sovereign Dealer Banks Cash PM Type 1: (cash for funding) (U.S. Treasury) (IRS and FXS) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills Swaps Swaps "Cash"

(term) (o/n) (o/n) (collat.) < (collat.) (o/n) …

… … … … … Equity T-Bills Swaps P-Bills "Cash" Equity (temporary) (term) (uncoll.) (term) (term) (permanent)

… … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (term) (term) (temporary)

Type 3: Risk PM Banks Dealer Banks Cash PM (tactical hedger) (wholesale) (CDS) (seclenders) [A] Cash P-Repos Private Assets FF FF Swaps Swaps "Ca sh" Cash (margin) (o/n) [B] (o/n) < (o/n) (collat.) < (collat.) (o/n) (collat.)

CDS … … … … … … … IRS Equity P-Loans Deposits Swaps P-Bills "Cash" FXS (temporary) (global) (term) (uncoll.) (term) (term)

Public Backstops Private Backstops 104 Source: Pozsar (2014) Liabilities Where is the real economy? Central Bank Dealer Banks Cash PM Money market funding of (Federal Reserve) (government desk) (reserve managers) capital market lending T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(see Mehrling et al, 2013). (o/n) … … … T-Notes T-Repos "Cash" Equity (term) (term) (permanent)

Risk PM Sovereign Dealer Banks Cash PM (cash for funding) (U.S. Treasury) (IRS and FXS) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills Swaps Swaps "Cash"

(term) (o/n) (o/n) (collat.) < (collat.) (o/n) …

… … … … … Equity T-Bills Swaps P-Bills "Cash" Equity (temporary) (term) (uncoll.) (term) (term) (permanent)

Risk PM Assets Banks Dealer Banks Cash PM (cash for shorting) (retail) (credit desk) (asset managers) Cash P-Repos Reserves FF P-Repos P-Repos "Cash" CDS (collat.) ( (term) (o/n) < (o/n) (o/n) < (o/n) (o/n) IRS

… … … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (term) (term) (temporary)

Risk PM Banks Dealer Banks Cash PM (cash for margining) (wholesale) (CDS) (seclenders)

Cash P-Repos Private Assets FF FF Swaps Swaps "Cash" Cash (margin) (o/n) (o/n) < (o/n) (collat.) < (collat.) (o/n) (collat.)

CDS … … … … … … … IRS Equity P-Loans Deposits Swaps P-Bills "Cash" FXS (temporary) (global) (term) (uncoll.) (term) (term)

Public Backstops Private Backstops 105 Source: Pozsar (2014) Liabilities Where is the real economy? Central Bank Dealer Banks Cash PM Money market funding of (Federal Reserve) (government desk) (reserve managers) capital market lending… T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … [1] Funded risk PMs’ T-Notes T-Repos "Cash" Equity securities portfolios,… (term) (term) (permanent)

Risk PM Sovereign Dealer Banks Cash PM (cash for funding) (U.S. Treasury) (IRS and FXS) (corporations) [1] T-Notes T-Repos Public Assets Reserves T-Bills Swaps Swaps "Cash"

(global) (term) (o/n) (o/n) (collat.) < (collat.) (o/n) …

… … … … … Equity T-Bills Swaps P-Bills "Cash" Equity (temporary) (term) (uncoll.) (term) (term) (permanent)

… … … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (term) (term) (temporary)

Risk PM Banks Dealer Banks Cash PM (cash for margining) (wholesale) (CDS) (seclenders)

Cash P-Repos Private Assets FF FF Swaps Swaps "Cash" Cash (margin) (o/n) (o/n) < (o/n) (collat.) < (collat.) (o/n) (collat.)

CDS … … … … … … … IRS Equity P-Loans Deposits Swaps P-Bills "Cash" FXS (temporary) (global) (term) (uncoll.) (term) (term)

Public Backstops Private Backstops 106 Source: Pozsar (2014) Liabilities Where is the real economy? Central Bank Dealer Banks Cash PM Money market funding of (Federal Reserve) (government desk) (reserve managers) capital market lending… T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … [2] Foreign banks’ USD T-Notes T-Repos "Cash" Equity securities portfolios,… (term) (term) (permanent)

Risk PM Sovereign Dealer Banks Cash PM (cash for funding) (U.S. Treasury) (IRS and FXS) (corporations) [1] T-Notes T-Repos Public Assets Reserves T-Bills Swaps Swaps "Cash"

(global) (term) (o/n) (o/n) (collat.) < (collat.) (o/n) …

… … … … … Equity T-Bills Swaps P-Bills "Cash" Equity (temporary) (term) (uncoll.) (term) (term) (permanent)

… … … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (term) (term) (temporary)

Risk PM Banks Dealer Banks Cash PM (cash for margining) (wholesale) (CDS) (seclenders)

Cash P-Repos Private Assets FF FF Swaps Swaps "Cash" Cash (margin) (o/n) (o/n) < (o/n) (collat.) < (collat.) (o/n) (collat.)

CDS … … … … … … … IRS Equity [2] P-Loans Deposits Swaps P-Bills "Cash" FXS (temporary) (global) (term) (uncoll.) (term) (term)

Public Backstops Private Backstops 107 Source: Pozsar (2014) Liabilities Where is the real economy? Central Bank Dealer Banks Cash PM Money market funding of (Federal Reserve) (government desk) (reserve managers) capital market lending… T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … [3] Large U.S. banks’ T-Notes T-Repos "Cash" Equity securities portfolios,… (term) (term) (permanent)

Risk PM Sovereign Dealer Banks Cash PM (cash for funding) (U.S. Treasury) (IRS and FXS) (corporations) [1] T-Notes T-Repos Public Assets Reserves T-Bills Swaps Swaps "Cash"

(global) (term) (o/n) (o/n) (collat.) < (collat.) (o/n) …

… … … … … Equity T-Bills Swaps P-Bills "Cash" Equity (temporary) (term) (uncoll.) (term) (term) (permanent)

… … … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (term) (term) (temporary)

Risk PM Banks Dealer Banks Cash PM (cash for margining) (wholesale) (CDS) (seclenders)

Cash P-Repos Private Assets FF FF Swaps Swaps "Cash" Cash (margin) (o/n) (o/n) < (o/n) (collat.) < (collat.) (o/n) (collat.)

CDS … … … … … … … IRS Equity [2] P-Notes Deposits Swaps P-Bills "Cash" FXS (temporary) [3] (global) (term) (uncoll.) (term) (term)

Public Backstops Private Backstops 108 Source: Pozsar (2014) Liabilities Where is the real economy? Central Bank Dealer Banks Cash PM Money market funding of (Federal Reserve) (government desk) (reserve managers) capital market lending… T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) …

(o/n) … … … [4] Dealer banks’ securities [4] T-Notes T-Repos "Cash" Equity inventories (net financing). (global) (term) (term) (permanent)

Risk PM Sovereign Dealer Banks Cash PM (cash for funding) (U.S. Treasury) (IRS and FXS) (corporations) [1] T-Notes T-Repos Public Assets Reserves T-Bills Swaps Swaps "Cash"

(global) (term) (o/n) (o/n) (collat.) < (collat.) (o/n) …

… … … … … Equity T-Bills Swaps P-Bills "Cash" Equity (temporary) (term) (uncoll.) (term) (term) (permanent)

… … … … … … … FXS T-Notes Equity P-Loans Deposits [4] P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (global) (term) (term) (temporary)

Risk PM Banks Dealer Banks Cash PM (cash for margining) (wholesale) (CDS) (seclenders)

Cash P-Repos Private Assets FF FF Swaps Swaps "Cash" Cash (margin) (o/n) (o/n) < (o/n) (collat.) < (collat.) (o/n) (collat.)

CDS … … … … … … … IRS Equity [2] P-Notes Deposits Swaps P-Bills "Cash" FXS (temporary) [3] (global) (term) (uncoll.) (term) (term)

Public Backstops Private Backstops 109 Source: Pozsar (2014) Liabilities Not all repos are equal: Central Bank Dealer Banks Cash PM Most repos are responsible (Federal Reserve) (government desk) (reserve managers) for facilitating price dis- T-Notes Currency T-Repos T-Repos "Cash" Reserves (term) < (term) (o/n) … covery in a market making (o/n) … … … context, but not funding [4] T-Notes T-Repos "Cash" Equity (global) (term) (term) (permanent) the real economy directly. Risk PM Sovereign Dealer Banks Cash PM (cash for funding) (U.S. Treasury) (IRS and FXS) (corporations) [1] T-Notes T-Repos Public Assets Reserves T-Bills Swaps Swaps "Cash"

(global) (term) (o/n) (o/n) (collat.) < (collat.) (o/n) …

… … … … … Equity T-Bills Swaps P-Bills "Cash" Equity (temporary) (term) (uncoll.) (term) (term) (permanent)

Risk PM Assets Banks Dealer Banks Cash PM (cash for shorting) (retail) (credit desk) (asset managers) [Ø] Cash P-Repos Reserves FF P-Repos P-Repos "Cash" CDS (collat.) ( (term) (o/n) < (o/n) (o/n) < (o/n) (o/n) IRS

… … … … … … … FXS T-Notes Equity P-Loans Deposits [4] P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (global) (term) (term) (temporary)

Risk PM Banks Dealer Banks Cash PM (cash for margining) (wholesale) (CDS) (seclenders)

[Ø] Cash P-Repos Private Assets FF FF Swaps Swaps "Cash" Cash (margin) (o/n) (o/n) < (o/n) (collat.) < (collat.) (o/n) (collat.)

CDS … … … … … … … IRS Equity [2] P-Notes Deposits Swaps P-Bills "Cash" FXS (temporary) [3] (global) (term) (uncoll.) (term) (term)

Public Backstops Private Backstops 110 Source: Pozsar (2014) Liabilities RRPs and risk PMs: Central Bank Dealer Banks Cash PM Through RRPs, the Fed will (Federal Reserve) (government desk) (reserve managers) have direct control over T-Notes RRPs RRPs T-Repos "Cash" (o/n) (o/n) < (o/n) (o/n) … haircuts and leverage. Fed … … … … haircuts will be the floor. Currency T-Notes T-Repos "Cash" Equity Reserves (global) (term) (term) (permanent)

Risk PM Sovereign Money Funds Cash PM (cash for funding) (U.S. Treasury) (government-only) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills RRPs T-CNAVs "Cash"

(global) (term) (o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … … Equity T-Bills T-Bills "Cash" Equity (temporary) (term) (term) (term) (permanent)

Risk PM Assets Banks Dealer Banks Cash PM (cash for shorting) (retail) (credit desk) (asset managers) Cash P-Repos Reserves FF RRPs P-Repos "Cash" CDS (collat.) ( (term) (o/n) < (o/n) (o/n) < (o/n) (o/n) IRS

… … … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (global) (term) (term) (temporary)

Risk PM Banks Money Funds Cash PM (cash for margining) (wholesale) (prime) (seclenders)

Cash P-Repos Private Assets FF FF RRPs P-CNAVs "Cash" Cash (margin) (o/n) (o/n) < (o/n) (o/n) < (o/n) (o/n) (collat.)

CDS … … … … … … IRS Equity P-Notes Deposits P-Bills "Cash" FXS (temporary) (global) (term) (term) (term)

Public Backstops Private Backstops 111 Source: Pozsar (2014) Liabilities RRPs and risk PMs: Central Bank Dealer Banks Cash PM Fed will have control over (Federal Reserve) (government desk) (reserve managers) market-based credit cycles. T-Notes RRPs RRPs T-Repos "Cash" (o/n) (o/n) < (o/n) (o/n) …

This will raise the cost of … … … … leverage for risk PMs and Currency T-Notes T-Repos "Cash" Equity Reserves (global) (term) (term) (permanent) reduce seclending volumes. Risk PM Sovereign Money Funds Cash PM (cash for funding) (U.S. Treasury) (government-only) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills RRPs T-CNAVs "Cash"

(global) (term) (o/n) (o/n) (o/n) < (o/n) (o/n) …

… … … … Equity T-Bills T-Bills "Cash" Equity (temporary) (term) (term) (term) (permanent)

… … … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (global) (term) (term) (temporary)

Risk PM Banks Money Funds Cash PM (cash for margining) (wholesale) (prime) (seclenders)

Cash P-Repos Private Assets FF FF RRPs P-CNAVs "Cash" Cash (margin) (o/n) (o/n) < (o/n) (o/n) < (o/n) (o/n) (collat.)

CDS … … … … … … IRS Equity P-Notes Deposits P-Bills "Cash" FXS (temporary) (global) (term) (term) (term)

Public Backstops Private Backstops 112 Source: Pozsar (2014) Liabilities 1. The Hierarchy of Money. 2. The Hierarchy of Access. 3. The Hierarchy of Uses.. 4. The Dealer Eco-System. 5. The Macro Perspective. 6. Policy Implications...

113 “If you can’t explain it to Central Bank Dealer Banks Cash PM a six year old you don’t un- (Federal Reserve) (government desk) (reserve managers) derstand it yourself.” T-Notes Currency T-Repos T-Repos "Cash"

Reserves (term) < (term) (o/n) …

(o/n) … … … Albert Einsteinxxxx T-Notes T-Repos "Cash" Equity (global) (term) (term) (permanent)

Risk PM Sovereign Dealer Banks Cash PM (cash for funding) (U.S. Treasury) (IRS and FXS) (corporations) T-Notes T-Repos Public Assets Reserves T-Bills Swaps Swaps "Cash"

(global) (term) (o/n) (o/n) (collat.) < (collat.) (o/n) …

… … … … … Equity T-Bills Swaps P-Bills "Cash" Equity (temporary) (term) (uncoll.) (term) (term) (permanent)

… … … … … … … FXS T-Notes Equity P-Loans Deposits P-Notes P-Repos "Cash" Equity P-Notes (temporary) (local) (term) (global) (term) (term) (temporary)

Risk PM Banks Dealer Banks Cash PM (cash for margining) (wholesale) (CDS) (seclenders)

Cash P-Repos Private Assets FF FF Swaps Swaps "Cash" Cash (margin) (o/n) (o/n) < (o/n) (collat.) < (collat.) (o/n) (collat.)

CDS … … … … … … … IRS Equity P-Notes Deposits Swaps P-Bills "Cash" FXS (temporary) (global) (term) (uncoll.) (term) (term)

Public Backstops Private Backstops 114 Source: Pozsar (2014) Liabilities “If you can’t explain it to Central Bank Dealer Banks a six year old you don’t un- (Federal Reserve) (government desk) derstand it yourself.” T-Notes Currency T-Repos T-Repos Reserves (term) < (term)

(o/n) … … Albert Einsteinxxxx T-Notes T-Repos (global) (term)

Risk PM Sovereign Dealer Banks Cash PM (cash for funding) (U.S. Treasury) (IRS and FXS) (search for safety)

Public Assets

T-Notes T-Repos Reserves T-Bills Swaps Swaps … CDS "Cash" (global) (term) (o/n) (o/n) (collat.) < (collat.) IRS

… … … … FXS Equity T-Bills Swaps P-Bills Equity (temporary) (term) (uncoll.) (term) (temporary)

Risk PM Assets Banks Dealer Banks (cash for shorting) (retail) (credit desk) Cash P-Repos Reserves FF P-Repos P-Repos (collat.) ( (term) (o/n) < (o/n) (o/n) < (o/n)

… … … … … … T-Notes Equity P-Loans Deposits P-Notes P-Repos P-Notes (temporary) (local) (term) (global) (term)

Risk PM Banks Dealer Banks (cash for margining) (wholesale) (CDS)

Cash P-Repos Private Assets FF FF Swaps Swaps (margin) (o/n) (o/n) < (o/n) (collat.) < (collat.)

CDS … … … … … … IRS Equity P-Notes Deposits Swaps P-Bills FXS (temporary) (global) (term) (uncoll.) (term)

Public Backstops Private Backstops 115 Source: Pozsar (2014) Liabilities “If you can’t explain it to Central Bank Dealer Banks a six year old you don’t un- (Federal Reserve) (government desk) derstand it yourself.” T-Notes Currency T-Repos T-Repos Reserves (term) < (term)

(o/n) … … Albert Einsteinxxxx T-Notes T-Repos (global) (term)

Risk PM Sovereign Dealer Banks Cash PM (search for yield) (U.S. Treasury) (IRS and FXS) (search for safety)

Public Assets

T-Notes T-Repos Reserves T-Bills Swaps Swaps … CDS "Cash" P-Notes P-Repos (o/n) (o/n) (collat.) < (collat.) IRS

CDS … … … … FXS IRS Equity T-Bills Swaps P-Bills Equity FXS (temporary) (term) (uncoll.) (term) (temporary)

Assets Banks Dealer Banks (retail) (credit desk) Reserves FF P-Repos P-Repos (o/n) < (o/n) (o/n) < (o/n)

… … … … P-Loans Deposits P-Notes P-Repos (local) (term) (global) (term)

Banks Dealer Banks (wholesale) (CDS)

Private Assets FF FF Swaps Swaps (o/n) < (o/n) (collat.) < (collat.)

… … … … P-Notes Deposits Swaps P-Bills (global) (term) (uncoll.) (term)

Public Backstops Private Backstops 116 Source: Pozsar (2014) Liabilities “If you can’t explain it to Central Bank Money Dealers a six year old you don’t un- (Federal Reserve) (cash for collateral) derstand it yourself.” T-Notes Currency Matched Matched Reserves books < books

(o/n) … … Albert Einsteinxxxx Trading Financing inventory (net)

Risk PM Sovereign Dealer Banks Cash PM (search for yield) (U.S. Treasury) (IRS and FXS) (search for safety)

Public Assets

T-Notes T-Repos Reserves T-Bills Swaps Swaps … CDS "Cash" P-Notes P-Repos (o/n) (o/n) (collat.) < (collat.) IRS

CDS … … … … FXS IRS Equity T-Bills Swaps P-Bills Equity FXS (temporary) (term) (uncoll.) (term) (temporary)

Assets Banks Money Dealers (retail) (cash for collateral) Reserves FF Matched Matched (o/n) < (o/n) books < books

… … … … P-Loans Deposits Trading Financing (local) (term) inventory (net)

Banks Dealer Banks (wholesale) (CDS)

Private Assets FF FF Swaps Swaps (o/n) < (o/n) (collat.) < (collat.)

… … … … P-Notes Deposits Swaps P-Bills (global) (term) (uncoll.) (term)

Public Backstops Private Backstops 117 Source: Pozsar (2014) Liabilities “If you can’t explain it to Central Bank Money Dealers a six year old you don’t un- (Federal Reserve) (cash for collateral) derstand it yourself.” T-Notes Currency Matched Matched Reserves books < books

(o/n) … … Albert Einsteinxxxx Trading Financing inventory (net)

Risk PM Sovereign Risk Dealers Cash PM (search for yield) (U.S. Treasury) (risk for collateral) (search for safety)

Public Assets

T-Notes T-Repos Reserves T-Bills Matched Matched … CDS "Cash" P-Notes P-Repos (o/n) (o/n) books < books IRS

CDS … … … … FXS IRS Equity T-Bills Trading Financing Equity FXS (temporary) (term) inventory (net) (temporary)

Assets Banks Money Dealers (retail) (cash for collateral) Reserves FF Matched Matched (o/n) < (o/n) books < books

… … … … P-Loans Deposits Trading Financing (local) (term) inventory (net)

Banks Risk Dealers (wholesale) (risk for collateral)

Private Assets FF FF Matched Matched (o/n) < (o/n) books < books

… … … … P-Notes Deposits Trading Financing (global) (term) inventory (net)

Public Backstops Private Backstops 118 Source: Pozsar (2014) Liabilities “If you can’t explain it to Central Bank a six year old you don’t un- (Federal Reserve) derstand it yourself.” T-Notes Currency Reserves Albert Einsteinxxxx (o/n)

Risk PM Sovereign Money Dealers Cash PM (search for yield) (U.S. Treasury) (cash for collateral) (search for safety)

Public Assets

T-Notes T-Repos Reserves T-Bills Matched Matched … CDS "Cash" P-Notes P-Repos (o/n) (o/n) books < books IRS

CDS … … … … FXS IRS Equity T-Bills Trading Financing Equity FXS (temporary) (term) inventory (net) (temporary)

Assets Banks Risk Dealers (retail) (risk for collateral) Reserves FF Matched Matched (o/n) < (o/n) books < books

… … … … P-Loans Deposits Trading Financing (local) (term) inventory (net)

Banks (wholesale)

Private Assets FF FF (o/n) < (o/n)

… … P-Notes Deposits (global) (term)

Public Backstops Private Backstops 119 Source: Pozsar (2014) Liabilities “If you can’t explain it to a six year old you don’t un- derstand it yourself.”

Albert Einsteinxxxx

Risk PM Money Dealers Cash PM (search for yield) (cash for collateral) (search for safety)

T-Notes T-Repos Matched Matched … CDS "Cash" P-Notes P-Repos books < books IRS

CDS … … … FXS IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealers (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

120 Source: Pozsar (2014) The dealer eco-system:

Risk PM Money Dealer Cash PM (search for yield) (cash for collateral) (search for safety)

T-Notes T-Repos Matched Matched … CDS "Cash" P-Notes P-Repos books < books IRS

CDS … … … FXS IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

121 Source: Mehrling et al (2013) – Bagehot Was a Shadow Banker The dealer eco-system:

Risk and cash PMs…

Risk PM Money Dealer Cash PM (search for yield) (cash for collateral) (search for safety)

T-Notes T-Repos Matched Matched … CDS "Cash" P-Notes P-Repos books < books IRS

CDS … … … FXS IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

122 Source: Mehrling et al (2013) – Bagehot Was a Shadow Banker The dealer eco-system:

Risk and cash PMs and money and risk dealers.

Risk PM Money Dealer Cash PM (search for yield) (cash for collateral) (search for safety)

T-Notes T-Repos Matched Matched … CDS "Cash" P-Notes P-Repos books < books IRS

CDS … … … FXS IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

123 Source: Mehrling et al (2013) – Bagehot Was a Shadow Banker The dealer eco-system:

Risk and cash PMs and money and risk dealers. Matched book…

Risk PM Money Dealer Cash PM (search for yield) (cash for collateral) (search for safety)

T-Notes T-Repos Matched Matched … CDS "Cash" P-Notes P-Repos books < books IRS

CDS … … … FXS IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

124 Source: Mehrling et al (2013) – Bagehot Was a Shadow Banker The dealer eco-system:

Risk and cash PMs and money and risk dealers. Matched book and “inventory” (net) positions.

Risk PM Money Dealer Cash PM (search for yield) (cash for collateral) (search for safety)

T-Notes T-Repos Matched Matched … CDS "Cash" P-Notes P-Repos books < books IRS

CDS … … … FXS IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

125 Source: Mehrling et al (2013) – Bagehot Was a Shadow Banker Search for yield versus search for safety:

Risk PMs are security rich but return poor. They always search for yield. Cash PMs are cash rich but safety poor. They primarily search for safety.

Risk PM Money Dealer Cash PM (search for yield) (cash for collateral) (search for safety)

T-Notes T-Repos Matched Matched … CDS "Cash" P-Notes P-Repos books < books IRS

CDS … … … FXS IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

126 Source: Pozsar (2014) Natural complements:

Risk PMs repo securities out and cash in. Cash PMs repo cash out and securities in.

Risk PM Money Dealer Cash PM (search for yield) (cash for collateral) (search for safety)

T-Notes T-Repos Matched Matched … CDS "Cash" P-Notes P-Repos books < books IRS

CDS … … … FXS IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

Securities Out Securities In

Cash In Cash Out

127 Source: Pozsar (2014) The role of collateral:

Collateral gives sense of safety for cash lenders. Cash enables risk taking via funding and shorting.

Risk PM Money Dealer Cash PM (search for yield) (cash for collateral) (search for safety)

T-Notes T-Repos Matched Matched … CDS "Cash" P-Notes P-Repos books < books IRS

CDS … … … FXS IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

Securities Out Securities In

Cash In Cash Out

128 Source: Pozsar (2014) The role of collateral:

Swaps positions give rise to un-secured derivatives receivables for those in the money. Collateral gives sense of safety for those in the money, who are de facto cash lenders.

Risk PM Money Dealer Cash PM (search for yield) (cash for collateral) (search for safety)

T-Notes T-Repos Matched Matched … CDS "Cash" P-Notes P-Repos books < books IRS

CDS … … … FXS IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

Securities Out Securities In

Cash In Cash Out

129 Source: Pozsar (2014) Source with the difference used to finance inventories. Risk PMs absorbed absorbed PMs Risk inventories. finance to used difference with the on, lent were trillion $2.5 Of this, dealers. with in cash trillion $3 over placed Cash PMs 2012Q2 asof $ trillions market: U.S. repo the Sizing : Pozsar (2014) and Copeland et al (2012) et al and Copeland (2014) Pozsar : P-Notes T-Notes (search foryield) FXS IRS CDS Securities Out Cash In Risk PM (temporary) P-Repos T-Repos $1,983 $2,446 Equity Reverse RepoTransactions $463

- - … Total Net DvP GCF DvP - (cash forcollateral) inventory Trading Matched $1,983 $2,446 books $589 $463 (inter-dealer) - … Money Dealer GCF < Financing Matched $1,608 $3,035 (net) books $964 $463

- … Repo Transactions Total DvP TRP GCF DvP TRP - (search forsafety) $1,608 $3,035 "Cash" $964 $463 Securities In - $2 trillion $2 Cash Out Cash PM

… (temporary) Equity FXS IRS CDS in funding. in 130 Money dealing using public bonds by motive: $ trillions 4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0 Assets Liabilities Assets Liabilities Q2-07 Q3-13 Secs. In [SI] RRs [SI] Secs. Borrowed [SI] Secs. Out [SO] RPs [SO] Secs. Loaned [SO] Balance 131 Source: Haver, Federal Reserve Bank of New York Money dealing using private bonds by motive: $ trillions 500

450

400

350

300

250

200

150

100

0 Assets Liabilities Assets Liabilities Q2-07 Q3-13 Secs. In [SI] RRs [SI] Secs. Borrowed [SI] Secs. Out [SO] RPs [SO] Secs. Loaned [SO] Balance 132 Source: Haver, Federal Reserve Bank of New York 1. The Hierarchy of Money. 2. The Hierarchy of Access. 3. The Hierarchy of Uses.. 4. The Dealer Eco-System. 5. The Macro Perspective. 6. Policy Implications...

133 Macro imbalances shaping the eco-system: Present and future macro imbalances shape the contours of the global financial eco-system. What dealer banks do is a reflection of the eco-system they inhabit.

Imbalances Imbalances (future) (present)

Macro Drivers Risk PM Money Dealer Cash PM Macro Drivers (global and local) (search for yield) (cash for collateral) (search for safety) (global and local)

T-Notes T-Repos Matched Matched … CDS "Cash" P-Notes P-Repos books < books IRS

CDS … … … FXS IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

Securities Out Securities In

Cash In Cash Out

134 Source: Pozsar (2014) Macro imbalances shaping the eco-system: The secular rise of cash PMs has been driven by… [1] the secular rise of managed FX regimes and FX reserves’ so-called “liquidity tranches”.

Imbalances Imbalances (future) (present)

Macro Drivers Risk PM Money Dealer Cash PM Macro Drivers (global and local) (search for yield) (cash for collateral) (search for safety) (global and local)

T-Notes T-Repos Matched Matched … CDS Managed FX Regimes [1] "Cash" P-Notes P-Repos books < books IRS

CDS … … … FXS IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

Securities Out Securities In

Cash In Cash Out

135 Source: Pozsar (2014) Macro imbalances shaping the eco-system: The secular rise of cash PMs has been driven by… [2] the secular rise of corporate profits vs. stagnant wages and capex (see Summers, 2013).

Imbalances Imbalances (future) (present)

Macro Drivers Risk PM Money Dealer Cash PM Macro Drivers (global and local) (search for yield) (cash for collateral) (search for safety) (global and local)

T-Notes T-Repos Matched Matched … CDS Managed FX Regimes [1] "Cash" P-Notes P-Repos books < books IRS Capital vs. Labour [2]

CDS … … … FXS IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

Securities Out Securities In

Cash In Cash Out

136 Source: Pozsar (2014) Macro imbalances shaping the eco-system: The secular rise of cash PMs has been driven by… [3] the secular rise of a highly concentrated asset management complex (see OFR, 2013).

Imbalances Imbalances (future) (present)

Macro Drivers Risk PM Money Dealer Cash PM Macro Drivers (global and local) (search for yield) (cash for collateral) (search for safety) (global and local)

T-Notes T-Repos Matched Matched … CDS Managed FX Regimes [1] "Cash" P-Notes P-Repos books < books IRS Capital vs. Labour [2]

CDS … … … FXS Cash Pooling (AMX) [3] IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

Securities Out Securities In

Cash In Cash Out

137 Source: Pozsar (2014) Macro imbalances shaping the eco-system: The secular rise of risk PMs has been driven by… [4] the secular rise in underfunded pension promises (see Caballero, 2013).

Imbalances Imbalances (future) (present)

Macro Drivers Risk PM Money Dealer Cash PM Macro Drivers (global and local) (search for yield) (cash for collateral) (search for safety) (global and local)

[4] Underfunded Pensions T-Notes T-Repos Matched Matched … CDS Managed FX Regimes [1] "Cash" P-Notes P-Repos books < books IRS Capital vs. Labour [2]

CDS … … … FXS Cash Pooling (AMX) [3] IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

Securities Out Securities In

Cash In Cash Out

138 Source: Pozsar (2014) Macro imbalances shaping the eco-system: The secular rise of risk PMs has been driven by… [5] the secular rise in FX reserves’ sterilization costs (see Borio et al, 2008).

Imbalances Imbalances (future) (present)

Macro Drivers Risk PM Money Dealer Cash PM Macro Drivers (global and local) (search for yield) (cash for collateral) (search for safety) (global and local)

[4] Underfunded Pensions T-Notes T-Repos Matched Matched … CDS Managed FX Regimes [1] "Cash" [5] Sterilization Costs P-Notes P-Repos books < books IRS Capital vs. Labour [2]

CDS … … … FXS Cash Pooling (AMX) [3] IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

Securities Out Securities In

Cash In Cash Out

139 Source: Pozsar (2014) Macro imbalances shaping the eco-system: The secular rise of risk PMs has been driven by… [6] the secular decline in yields and un-changed return expectations (see BlackRock, 2013).

Imbalances Imbalances (future) (present)

Macro Drivers Risk PM Money Dealer Cash PM Macro Drivers (global and local) (search for yield) (cash for collateral) (search for safety) (global and local)

[4] Underfunded Pensions T-Notes T-Repos Matched Matched … CDS Managed FX Regimes [1] "Cash" [5] Sterilization Costs P-Notes P-Repos books < books IRS Capital vs. Labour [2]

[6] "Rosy" Expectations CDS … … … FXS Cash Pooling (AMX) [3] IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

Securities Out Securities In

Cash In Cash Out

140 Source: Pozsar (2014) Four simple goals that make the eco-system go ‘round:

[1] CIOs aim to generate enough return to fulfil their mandate to “meet liabilities”. This is why CIOs look beyond long-only strategies and allocate to leveraged risk PMs.

Imbalances Imbalances (future) (present)

Macro Drivers Risk PM Money Dealer Cash PM Macro Drivers (global and local) (search for yield) (cash for collateral) (search for safety) (global and local)

Underfunded Pensions T-Notes T-Repos Matched Matched … CDS Managed FX Regimes "Cash" Sterilization Costs P-Notes P-Repos books < books IRS Capital vs. Labour

"Rosy" Expectations CDS … … … FXS Cash Pooling (AMX) IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

CIOs "Meet Liabilities"

141 Source: Pozsar (2014) Four simple goals that make the eco-system go ‘round:

[2] Risk PMs aim to generate enough return to fulfil their mandate to “beat benchmarks”. Risk PMs get leverage from dealers, who get the cash to provide leverage from cash PMs.

Imbalances Imbalances (future) (present)

Macro Drivers Risk PM Money Dealer Cash PM Macro Drivers (global and local) (search for yield) (cash for collateral) (search for safety) (global and local)

Underfunded Pensions T-Notes T-Repos Matched Matched … CDS Managed FX Regimes "Cash" Sterilization Costs P-Notes P-Repos books < books IRS Capital vs. Labour

"Rosy" Expectations CDS … … … FXS Cash Pooling (AMX) IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

CIOs Risk PMs "Meet Liabilities" "Beat the Benchmark"

142 Source: Pozsar (2014) Four simple goals that make the eco-system go ‘round:

[3] Cash PMs aim to generate some return while fulfilling their mandate to “do not lose”. Cash PMs minimize credit risk by lending against collateral and are fanned by imbalances.

Imbalances Imbalances (future) (present)

Macro Drivers Risk PM Money Dealer Cash PM Macro Drivers (global and local) (search for yield) (cash for collateral) (search for safety) (global and local)

Underfunded Pensions T-Notes T-Repos Matched Matched … CDS Managed FX Regimes "Cash" Sterilization Costs P-Notes P-Repos books < books IRS Capital vs. Labour

"Rosy" Expectations CDS … … … FXS Cash Pooling (AMX) IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

CIOs Risk PMs Cash PMs "Meet Liabilities" "Beat the Benchmark" "Do Not Lose"

143 Source: Pozsar (2014) Four simple goals that make the eco-system go ‘round:

[4] CEOs at both the corporate and national levels are mandated to “grow” their profits and economies, respectively and this contributes to the skewed distribution of present incomes.

Imbalances Imbalances (future) (present)

Macro Drivers Risk PM Money Dealer Cash PM Macro Drivers (global and local) (search for yield) (cash for collateral) (search for safety) (global and local)

Underfunded Pensions T-Notes T-Repos Matched Matched … CDS Managed FX Regimes "Cash" Sterilization Costs P-Notes P-Repos books < books IRS Capital vs. Labour

"Rosy" Expectations CDS … … … FXS Cash Pooling (AMX) IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

CIOs Risk PMs Cash PMs CEOs "Meet Liabilities" "Beat the Benchmark" "Do Not Lose" "Grow"

144 Source: Pozsar (2014) 1. The Hierarchy of Money. 2. The Hierarchy of Access. 3. The Hierarchy of Uses.. 4. The Dealer Eco-System. 5. The Macro Perspective. 6. Policy Implications...

145 Implications for macro and asset price models:

These goal-driven rigidities are not included in asset price models. Topics for future research include the extent to which these compress the 10-year Treasury term premium.

Imbalances Imbalances (future) (present)

Macro Drivers Risk PM Money Dealer Cash PM Macro Drivers (global and local) (search for yield) (cash for collateral) (search for safety) (global and local)

Underfunded Pensions T-Notes T-Repos Matched Matched … CDS Managed FX Regimes "Cash" Sterilization Costs P-Notes P-Repos books < books IRS Capital vs. Labour

"Rosy" Expectations CDS … … … FXS Cash Pooling (AMX) IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

CIOs Risk PMs Cash PMs CEOs "Meet Liabilities" "Beat the Benchmark" "Do Not Lose" "Grow"

146 Source: Pozsar (2014) Implications for global macro-financial accounting:

None of these aspects of the eco-system are measured by the U.S. Flow of Funds Accounts. The Flow of Funds accounts need a set of Flow of Collateral and Flow or Risk satellite accounts.

Imbalances Imbalances (future) (present)

Macro Drivers Risk PM Money Dealer Cash PM Macro Drivers (global and local) (search for yield) (cash for collateral) (search for safety) (global and local)

Underfunded Pensions T-Notes T-Repos Matched Matched … CDS Managed FX Regimes "Cash" Sterilization Costs P-Notes P-Repos books < books IRS Capital vs. Labour

"Rosy" Expectations CDS … … … FXS Cash Pooling (AMX) IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

CIOs Risk PMs Cash PMs CEOs "Meet Liabilities" "Beat the Benchmark" "Do Not Lose" "Grow"

147 Source: Pozsar (2014) Implications for governance:

Level III Level II Level I Level II Level III

G20 ? FSB ? G20

Macro Drivers Risk PM Money Dealer Cash PM Macro Drivers (global and local) (search for yield) (cash for collateral) (search for safety) (global and local)

Underfunded Pensions T-Notes T-Repos Matched Matched … CDS Managed FX Regimes "Cash" Sterilization Costs P-Notes P-Repos books < books IRS Capital vs. Labour

"Rosy" Expectations CDS … … … FXS Cash Pooling (AMX) IRS Equity Trading Financing Equity FXS (temporary) inventory (net) (temporary)

Risk Dealer (risk for collateral) Matched Matched books < books

… … Trading Financing inventory (net)

CIOs Risk PMs Cash PMs CEOs "Meet Liabilities" "Beat the Benchmark" "Do Not Lose" "Grow"

148 Source: Pozsar (2014) Conclusions: A Macro View on Shadow Banking

149 1. Bond portfolios are getting more and more leveraged and bonds are becoming more and more valuable as collateral. 2. Leveraged bond portfolios help asset-liability matching in an ever-lower yield environment and collateral gives cash pools safety in a system w/ an outdated safety net. 3. Credit, maturity and liquidity transformation is a start, but ask “why”: to manage future and present imbalances. 4. Credit transformation: bond-like volatility and equity- like returns to help CIOs meet future promises (“theme”). 5. Maturity and liquidity transformation: safe, short-term assets for the safekeeping of skewed incomes (“theme”). 6. RRPs are about more than just controlling short rates. They give shadow banks access to a reserve account at the Fed, and are a first step toward “dealer of last resort”. 150 References:

151 Pozsar, Zoltan, 2014, “Shadow Banking: The Money View,” Office of Financial Research (OFR) Working Paper(forthcoming).

Pozsar, Zoltan, 2013, “Shadow Banking and the Global Financial Eco-System,” VoxEU.

Mehrling, Perry, Pozsar, Zoltan, Sweeney, James, Neilson, Dan, 2013, “Bagehot Was a Shadow Banker: Shadow Banking, Central Banking and the Future of Global Finance,” INET Working Paper.

Claessens, Stijn, Pozsar, Zoltan, Singh, Manmohan, Lev, Ratnovski 2013, “Shadow Banking: Economics and Policy,” IMF SDN 12/12.

Pozsar, Zoltan and McCulley, Paul, 2012, “Why Banking Works One Large Confidence Trick,” Financial Times.

Pozsar, Zoltan and Singh, Manmohan, 2011, “The Nonbank-Bank Nexus and the Shadow Banking System,” IMF WP 11/289.

Pozsar, Zoltan, 2011, “Institutional Cash Pools and the Triffin Dilemma

of the U.S. Banking System,” IMF WP 11/190. 152 Data Appendix:

153 U.S. Chartered Banks: 12,000 $ billions

[1] 10,000

[1] 8,000 [2]

[2]

6,000

4,000

[3] [3]

2,000

0 Assets Liabilities Assets Liabilities Q2-07 Q3-13 Loans PRBs PUBs RRs FF lent Reserves Balance DDs SDs LDs RPs GDF FF borrowed 154 Source: Haver, Federal Reserve Z.1, H.8 and author’s calculations New York Branches of Foreign Banks: 2,500 $ billions

2,000 [1]

1,500

[1] [2]

1,000 [2]

[3] [3]

500

[4] [4]

0 Assets Liabilities Assets Liabilities Q2-07 Q3-13 Loans PRBs PUBs RRs FF lent Reserves Balance DDs SDs LDs RPs FF borrowed GDF 155 Source: Haver, Federal Reserve Z.1, H.8 and author’s calculations Dealer Banks’ “Government” Trading Desks: 3,000 $ billions Securities In Securities Out

Cash Out Cash In 2,500 [4]

2,000 [3]

1,500

[2]

1,000

[1] 500

0 Assets Liabilities Q3-13

RR [o/n] SB [o/n] RR [< 30] SB [< 30] RR [30+] SB [30+] RP [o/n] SL [o/n] RP [< 30] SL [< 30] RP [30+] SL [30+] Net financing 156 Source: Haver, New York Fed (FR 2004) and author’s calculations Dealer Banks’ “Credit” Trading Desks: 250 $ billions Securities In Securities Out

Cash Out Cash In

200

[3] 150

100 [2]

[1]

0 Assets Liabilities Q3-13

RR [o/n] SB [o/n] RR [term] SB [term] RP [o/n] SL [o/n] RP [term] SL [term] Net financing 157 Source: Haver, New York Fed (FR 2004) and author’s calculations Government-Only Money Funds: 1,000 $ billions

900

800

700

[2] 600 [2]

500

400

300

200 [1] [1]

100

0 Assets Liabilities Assets Liabilities 2007 January 2014 Repos T-Bills T-Notes w/ RM < 1 Yr. GSEs Other CNAV [o/n] 158 Source: Haver, SEC and author’s calculations Prime Money Funds: 2,000 $ billions

1,800

1,600 [4] [4]

1,400

1,200

1,000 [3]

800 [3]

600

400 [2]

[2] 200 [1] [1]

0 Assets Liabilities Assets Liabilities 2007 January 2014 Repos [o/n] T-Bills T-Notes w/ RM < 1 Yr. GSEs LTDs CP Other CNAV [o/n] 159 Source: Haver, SEC and author’s calculations Mortgage REITs: 350 $ billions

300

250

200

150

100

0 Assets Liabilities Assets Liabilities Q2-07 Q3-13

Balance Agency RMBS Repos 160 Source: Haver, Federal Reserve Z.1 Offshore Dollar Banking: 10 $ trillions

0 Assets Liabilities Assets Liabilities Q2-07 Q3-13

Balance U.S. dollar assets U.S. dollar liabilities 161 Source: BIS