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LCR Premium in the Federal Funds Market

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Abstract

We document the existence of a regulatory premium in the federal funds market related to the implementation of the Liquidity Coverage Ratio (LCR). We use difference-in-differences analysis and confidential bank level data on borrowing in the fed funds and Eurodollar markets to compare the interest rates paid by banks subject to daily reporting of their liquidity profile (daily reporters) relative to other banks. We find that, after the implementation of LCR, daily reporters paid a higher rate compared to other banks when borrowing in the fed funds market given the LCR-favorability of many of the lenders in this market. In addition, on the days that banks borrowed in both the fed funds and Eurodollar markets, daily reporters paid a higher rate than other banks for their borrowing in the fed funds market but not for their borrowing in the Eurodollar market.

Suggested Citation

  • Alyssa G. Anderson & Manjola Tase, 2023. "LCR Premium in the Federal Funds Market," Finance and Economics Discussion Series 2023-071, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2023-71
    DOI: 10.17016/FEDS.2023.071
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    1. Bech, Morten L. & Klee, Elizabeth, 2011. "The mechanics of a graceful exit: Interest on reserves and segmentation in the federal funds market," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 415-431.
    2. Gara Afonso & Anna Kovner & Antoinette Schoar, 2011. "Stressed, Not Frozen: The Federal Funds Market in the Financial Crisis," Journal of Finance, American Finance Association, vol. 66(4), pages 1109-1139, August.
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    1. Anderson, Alyssa & Tase, Manjola, 2024. "Monetary policy pass-through after the LCR," Economics Letters, Elsevier, vol. 234(C).

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    JEL classification:

    • E49 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Other
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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