US Banks and Global Liquidity

We document the crucial role of bank reserves in global banks’ provision of short-term dollar liquidity after the Global Financial Crisis. Using daily supervisory data, we show that large US banks substitute their excess reserves at the Federal Reserve for short-term lending in the repo and foreign exchange swap markets in response to dollar funding shortages. Intrafirm liquidity sharing between depository institutions and broker-dealer subsidiaries within the same bank holding company are crucial to the “reserve-draining intermediation.” Our results highlight the importance of a large Federal Reserve balance sheet in the current regulatory environment to ensure the well-functioning of short-term funding markets.