IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/20253066.html
   My bibliography  Save this paper

The central bank’s balance sheet and treasury market disruptions

Author

Listed:
  • d'Avernas, Adrien
  • Vandeweyer, Quentin
  • Petersen, Damon

Abstract

This paper studies how Treasury market dynamics depend on adjustments to the central bank balance sheet. We introduce a dynamic model of Treasury bonds with traditional and shadow banks. In the model, both Treasury and repo market disruptions arise as a joint consequence of three frictions: (i) balance sheet costs,(ii) intraday reserves requirements, and (iii) imperfect substitutability between repo and bank deposits. Our model highlights the critical role of both sides of the central bank’s balance sheet as well as agents’ anticipation of shocks and policy interventions in matching observed market dynamics. JEL Classification: E43, E44, E52, G12

Suggested Citation

  • d'Avernas, Adrien & Vandeweyer, Quentin & Petersen, Damon, 2025. "The central bank’s balance sheet and treasury market disruptions," Working Paper Series 3066, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20253066
    Note: 3107481
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp3066~0891594d15.en.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Gara Afonso & Gabriele La Spada & Thomas M. Mertens & John C. Williams, 2023. "The Optimal Supply of Central Bank Reserves under Uncertainty," Staff Reports 1077, Federal Reserve Bank of New York.
    2. Alan Moreira & Alexi Savov, 2017. "The Macroeconomics of Shadow Banking," Journal of Finance, American Finance Association, vol. 72(6), pages 2381-2432, December.
    3. Nina Boyarchenko & Thomas M. Eisenbach & Pooja Gupta & Or Shachar & Peter Van Tassel, 2018. "Bank-Intermediated Arbitrage," Liberty Street Economics 20181018, Federal Reserve Bank of New York.
    4. Adam Copeland & Darrell Duffie & Yilin (David) Yang, 2025. "Reserves Were Not So Ample After All," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 140(1), pages 239-281.
    5. He, Zhiguo & Nagel, Stefan & Song, Zhaogang, 2022. "Treasury inconvenience yields during the COVID-19 crisis," Journal of Financial Economics, Elsevier, vol. 143(1), pages 57-79.
    6. Acharya, Viral & Chauhan, Rahul & Rajan, Raghuram & Steffen, Sascha, 2022. "Liquidity Dependence and the Waxing and Waning of Central Bank Balance Sheets," CEPR Discussion Papers 17622, C.E.P.R. Discussion Papers.
    7. Paul J. Santoro, 2012. "The evolution of Treasury cash management during the financial crisis," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 18(Apr).
    8. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 146-175.
    9. Leif Andersen & Darrell Duffie & Yang Song, 2019. "Funding Value Adjustments," Journal of Finance, American Finance Association, vol. 74(1), pages 145-192, February.
    10. Urban J Jermann, 2020. "Negative Swap Spreads and Limited Arbitrage," The Review of Financial Studies, Society for Financial Studies, vol. 33(1), pages 212-238.
    11. Kenneth D. Garbade & Frank M. Keane, 2020. "Market Function Purchases by the Federal Reserve," Liberty Street Economics 20200820, Federal Reserve Bank of New York.
    12. Huber, Amy Wang, 2023. "Market power in wholesale funding: A structural perspective from the triparty repo market," Journal of Financial Economics, Elsevier, vol. 149(2), pages 235-259.
    13. Wenxin Du & Alexander Tepper & Adrien Verdelhan, 2018. "Deviations from Covered Interest Rate Parity," Journal of Finance, American Finance Association, vol. 73(3), pages 915-957, June.
    14. Yiming Ma & Kairong Xiao & Yao Zeng, 2022. "Mutual Fund Liquidity Transformation and Reverse Flight to Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 35(10), pages 4674-4711.
    15. Huang, Ji, 2018. "Banking and shadow banking," Journal of Economic Theory, Elsevier, vol. 178(C), pages 124-152.
    16. William F. Diamond & Zhengyang Jiang & Yiming Ma, 2023. "The Reserve Supply Channel of Unconventional Monetary Policy," NBER Working Papers 31693, National Bureau of Economic Research, Inc.
    17. Markus K. Brunnermeier & Yuliy Sannikov, 2014. "A Macroeconomic Model with a Financial Sector," American Economic Review, American Economic Association, vol. 104(2), pages 379-421, February.
    18. Du, Wenxin & Hébert, Benjamin & Li, Wenhao, 2023. "Intermediary balance sheets and the treasury yield curve," Journal of Financial Economics, Elsevier, vol. 150(3).
    19. An, Ping & Yu, Mengxuan, 2018. "Neglected part of shadow banking in China," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 211-236.
    20. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," SciencePo Working papers Main hal-01168494, HAL.
    21. Benjamin Munyan, 2015. "Regulatory Arbitrage in Repo Markets," Working Papers 15-22, Office of Financial Research, US Department of the Treasury.
    22. Bassi, Claudio & Behn, Markus & Grill, Michael & Waibel, Martin, 2023. "Window dressing of regulatory metrics: evidence from repo markets," Working Paper Series 2771, European Central Bank.
    23. Adam Copeland & Antoine Martin & Michael Walker, 2014. "Repo Runs: Evidence from the Tri-Party Repo Market," Journal of Finance, American Finance Association, vol. 69(6), pages 2343-2380, December.
    24. Corradin, Stefano & Eisenschmidt, Jens & Hoerova, Marie & Linzert, Tobias & Schepens, Glenn & Sigaux, Jean-David, 2020. "Money markets, central bank balance sheet and regulation," Working Paper Series 2483, European Central Bank.
    25. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," SciencePo Working papers hal-01168494, HAL.
    26. Juliane Begenau & Tim Landvoigt, 2021. "Financial Regulation in a Quantitative Model of the Modern Banking System," NBER Working Papers 28501, National Bureau of Economic Research, Inc.
    27. Daniel Barth & R. Jay Kahn & Robert Mann, 2023. "Recent Developments in Hedge Funds’ Treasury Futures and Repo Positions: is the Basis Trade “Back"?," FEDS Notes 2023-08-30-2, Board of Governors of the Federal Reserve System (U.S.).
    28. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    29. Eisenschmidt, Jens & Ma, Yiming & Zhang, Anthony Lee, 2024. "Monetary policy transmission in segmented markets," Journal of Financial Economics, Elsevier, vol. 151(C).
    30. repec:hal:spmain:info:hdl:2441/hqvfahst79ekpe0losvq1h46k is not listed on IDEAS
    31. repec:spo:wpmain:info:hdl:2441/hqvfahst79ekpe0losvq1h46k is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Greg Buchak & Gregor Matvos & Tomasz Piskorski & Amit Seru, 2024. "Aggregate Lending and Modern Financial Intermediation: Why Bank Balance Sheet Models Are Miscalibrated," NBER Macroeconomics Annual, University of Chicago Press, vol. 38(1), pages 239-287.
    2. Adrien D'Avernas & Quentin Vandeweyer, 2024. "Treasury Bill Shortages and the Pricing of Short‐Term Assets," Journal of Finance, American Finance Association, vol. 79(6), pages 4083-4141, December.
    3. Eduardo Dávila & Ansgar Walther, 2021. "Corrective Regulation with Imperfect Instruments," NBER Working Papers 29160, National Bureau of Economic Research, Inc.
    4. Wei, Xin & Liu, Xi & Zhang, Xueyong, 2022. "Shadow banking and the cross-section of stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    5. Feng Min & Fenghua Wen & Jiayu Xu & Nan Wu, 2023. "Credit supply, house prices, and financial stability," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 2088-2108, April.
    6. Ji Huang & Zongbo Huang & Xiang Shao, 2023. "The Risk of Implicit Guarantees: Evidence from Shadow Banks in China," Review of Finance, European Finance Association, vol. 27(4), pages 1521-1544.
    7. Darrell Duffie & Michael Fleming & Frank Keane & Claire Nelson & Or Shachar & Peter Van Tassel, 2023. "Dealer capacity and US Treasury market functionality," BIS Working Papers 1138, Bank for International Settlements.
    8. Du, Wenxin & Hébert, Benjamin & Li, Wenhao, 2023. "Intermediary balance sheets and the treasury yield curve," Journal of Financial Economics, Elsevier, vol. 150(3).
    9. Bengui, Julien & Bianchi, Javier, 2022. "Macroprudential policy with leakages," Journal of International Economics, Elsevier, vol. 139(C).
    10. Hanson, Samuel G. & Malkhozov, Aytek & Venter, Gyuri, 2024. "Demand-and-supply imbalance risk and long-term swap spreads," Journal of Financial Economics, Elsevier, vol. 154(C).
    11. Jappelli, Ruggero & Pelizzon, Loriana & Subrahmanyam, Marti G., 2023. "Quantitative easing, the repo market, and the term structure of interest rates," SAFE Working Paper Series 395, Leibniz Institute for Financial Research SAFE.
    12. Peter Eccles & Paul Grout & Anna Zalewska & Paolo Siciliani, 2023. "Open banking, shadow banking and regulation," Bank of England working papers 1039, Bank of England.
    13. Huber, Amy Wang, 2023. "Market power in wholesale funding: A structural perspective from the triparty repo market," Journal of Financial Economics, Elsevier, vol. 149(2), pages 235-259.
    14. Luck, Stephan & Schempp, Paul, 2023. "Inefficient liquidity creation," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    15. d'Avernas, Adrien & Vandeweyer, Quentin & Darracq Pariès, Matthieu, 2020. "Unconventional monetary policy and funding liquidity risk," Working Paper Series 2350, European Central Bank.
    16. Xiang, Haotian, 2022. "Corporate debt choice and bank capital regulation," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    17. Ambrogio Cesa-Bianchi & Fernando Eguren-Martin, 2021. "Dash for dollars," Bank of England working papers 932, Bank of England.
    18. Valentin Haddad & Alan Moreira & Tyler Muir, 2021. "When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response [Funding value adjustments]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5309-5351.
    19. Kinda Hachem & Martin Kuncl, 2025. "The Prudential Toolkit with Shadow Banking," Staff Reports 1142, Federal Reserve Bank of New York.
    20. Kargar, Mahyar, 2021. "Heterogeneous intermediary asset pricing," Journal of Financial Economics, Elsevier, vol. 141(2), pages 505-532.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20253066. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.