Based in Paris, BNP Paribas' Economic Research Department is composed of economists and statisticians:
The Economic Research department’s mission is to cater to the economic research needs of the clients, business lines and functions of BNP Paribas. Our team of economists and statisticians covers a large number of advanced, developing and emerging countries, the real economy, financial markets and banking. As we foster the sharing of our research output with anyone who is interested in the economic situation or who needs insight into specific economic issues, this website presents our analysis, videos and podcasts.
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On 30 September, the Federal Housing Finance Agency (FHFA) announced its intention to raise counterparty exposure limits on the deposit accounts of Federal Home Loan Banks (FHLB) to the same level as those limits set for their federal funds loans, an approach already discussed in its December 2023 report. This harmonisation could lead FHLBs to favour deposits with banks, as these are better remunerated. Supply on the federal funds market, on which FHLBs occupy a prominent position as lenders, would be reduced, driving up the effective rate of federal funds.
After being left reeling by the unexpected money market crisis during its first round of quantitative tightening (QT1), the Federal Reserve (Fed) intends to manage the reduction of its balance sheet better. This means destroying some of the reserves held by banks at the Fed without triggering a shortage in central bank money, given the liquidity requirements imposed on banks.
Since June 2022, the US Federal Reserve (Fed) has scaled back its balance sheet, by limiting the reinvestment of maturing debt in its securities portfolio. The scale of the effects of this quantitative tightening (QT2) will depend in particular on the nature of buyers of newly issued securities.
BNP Paribas Economic Research wishes you all the best for 2024. On the macroeconomic front, the highlight of 2023 was the peak in official rates in the United States and the eurozone, but what is in store for 2024?In this video, you can discover the topics and points of attention that will be monitored throughout 2024 for each team: Banking Economy, OECD and Country Risk.
On the margins of discussions about banking regulation and supervision, the role played by the Federal Home Loan Banks (FHLB) prior to the bank run in Spring 2023 is bitterly disputed. Seeking to correct the distortions resulting from their status and refocus the FHLBs on their main mission, their regulator, the Federal Housing Finance Agency (FHFA), has proposed several areas of reform.However, limiting the FHLBs’ capacity to support bank liquidity could have significant effects on the money markets and structurally increase banks’ requirements for central bank money.
The net short position of hedge funds in the US Treasury futures market has expanded considerably over the course of the year. At the end of November, it stood at an unprecedented level of almost USD 800 billion. Asset managers, eager to hedge against interest-rate risk, increased their net long positions.
The FHFA recently proposed reforming the Federal Home Loan Banks, which are accused of having taken on the role of lender of next-to-last resort, a role that was much too big for them.
Last October, an average of over USD 1,500 bn was traded daily on the Treasuries repo markets through the Fixed Income Clearing Corporation (FICC), USD 500 bn more than in October 2022. While transactions between FICC clearing members remained relatively stable, sponsored repo loans rose sharply.
On average, over the past year, US money market funds (MMFs) have “deposited” almost USD 2,200bn in cash with the Federal Reserve (Fed) every day in exchange for the overnight reverse repurchase of Treasury securities held on the Fed’s balance sheet (Overnight Reverse Repo Facility, ON RRP). In recent months, these “deposits” have fallen sharply. On 17 July, they stood at «only» USD 1,730 bn.
In March 2023, the M2 measure of money supply contracted for the fifth consecutive month in the United States (-4.5% over one year).
The drawdowns of depository institutions from the US Federal Reserve’s (Fed) discount window have intensified over the past year. Their outstandings amounted to USD 4.6 bn on 18 January, certainly far from the USD 110 billion borrowed at the height of the 2008 financial crisis, but well above the USD 360 million borrowed on average for 15 years.
In June 2022, the US Federal Reserve kick-started a programme to reduce the size of its balance sheet (QT2). However, banking regulations could hinder its ambitions. The first quantitative tightening (QT1) programme, which was launched by the Fed in October 2017, had already been curtailed early due to the liquidity requirements imposed on banks. Balance sheet constraints could in turn bring QT2 to an early end. The tightened leverage standard is already reducing the ability of banks to act as intermediaries in the secondary markets for US Treasury securities while federal government financing needs continue to grow.
For the past 10 years the attractiveness of US Treasuries for foreign investors has been in decline. In the light of official projections that the US federal debt will almost double over the next ten years, strengthening their appetite appears paramount.
Liquidity in the US Treasuries market has deteriorated significantly since the start of the year. Against the backdrop of monetary tightening and fears of recession, the strengthening of the dollar and the high volatility in yields are discouraging investors, whether US or foreign, while the Fed has started to reduce its portfolio. Given the size of the debt to be financed (23,000 billion US dollars of marketable debt at the end of June 2022), the prudential constraints limiting the intermediation capacities of primary dealers are an aggravating factor. For many years now the attractiveness of US Treasuries for foreign investors has been in decline. The weighting of their holdings in marketable US federal debt stood at 32% at the end of June 2022 compared with 57% at the end of 2008
Since 1 June, the US Federal Reserve (Fed) has been scaling back its balance sheet, limiting the reinvestment of maturing debt in its securities portfolio. Assuming that the pace of disposals stays at the announced level, the Fed could shrink its balance sheet by around USD1,600 billion over eighteen months. The Fed’s securities portfolio (assets on its balance sheet) will automatically reduce, whilst a share of its liabilities, the cash placed with the Fed by commercial banks and/or money market funds, will be destroyed. In 2019, the Fed’s first experiment in quantitative tightening (QT1) had to be halted: it had exhausted the “excess” reserves over and above the liquidity constraints applied to the banks1 and caused the money markets to seize up
Over the past year, growth in the M2 measure of money supply in the USA1 has slowed from 27.1% y/y in February 2021 to 9.5% y/y in March 2022. This has mainly been due to the moderation in purchases, by the Federal Reserve (Fed) and banks, of Treasuries (blue bars) and mortgage-backed securities (MBS, hatched green bars). With the Fed having ended its net purchasing at the end of February 2022, the effect of QE was even smaller in Q1 2022. Since Q2 2021, the Fed’s repo arrangements with money market funds (light grey bars) have also resulted in the (temporary) destruction of money2. Other factors have pulled in the opposite direction
Growth in outstanding bank loans to NFCs decelerated in March 2022 (4.2%, from 4.5% in February) for the first time since September 2021 (by way of comparison, real year-on-year GDP growth was 5% in Q1 2022, from 4.7% in Q4 2021 according to Eurostat’s preliminary estimate, masking a slowdown on a quarterly basis, +0,2% q/q in Q1 2022 against +0,3% q/q in Q4 2021). Because of a substantial comparison effect (between March and August 2021, the virtual cessation of new guaranteed loans to NFCs and a first wave of loan repayments put the brakes on growth in lending), the impulse of credit to NFCs (reflecting the change, over a year, of the annual growth in outstanding loans) continued to improve – whilst remaining negative – to -1.0% in March 2022, from -2.6% in February.
The latest monitoring report by the Basel Committee on Banking Supervision (BCBS)1 shows that despite very accommodating monetary policies, the immediately available liquidity position of the big American banks did not improve between Q4 2019 and Q2 2021, unlike that of the big European banks2. According to the first published data, the average short-term liquidity ratio, the Liquidity Coverage Ratio (LCR)3 was 116% for the American G-SIBs in Q4 2021, compared to 119% in Q4 2019, while that of the European G-SIBs was about 173% and 141%, respectively. In both cases, the average ratios were still significantly higher than the minimum prudential requirement of 100%
Against the background of economic recovery (real year-on-year GDP growth of 14.4% in Q2 2021, followed by 3.9% in Q3 and 4.6% in Q4 according to Eurostat’s preliminary estimate), outstanding bank loans to non-financial companies (NFCs) and households continued to accelerate in the eurozone between May and December 2021. Although substantial comparison effects mean that the figure is still in negative territory, its impulse (measuring the variation in annual growth in outstanding loans over one year) improved to -0.6% in December 2021.
Since November 2020, there has been a significant increase in repurchase1 agreements by the US Federal Reserve (the Fed) with foreign central banks as part of the Foreign Repo Pool (FRRP). Two statistical series can be used to identify the Fed’s main counterparts.The structure of official foreign reserves2 indicates the amount of deposits (in the broad sense of the term, including repurchase agreements) made by each economy with “foreign central banks, the Bank of International Settlements, and the International Monetary Fund”. Given the weight of the USD, EUR, JPY and GBP in global foreign reserves, the Fed, the European Central Bank (ECB), the Bank of Japan (BoJ) and the Bank of England are probably the main beneficiaries
Last July, the US Federal Reserve (Fed) expanded its scope of intervention in the money markets. It now has a permanent repo facility (Standing Repo Facility or SRF) in addition to its reverse repo facility (Reverse Repo Program or RRP). These tools should allow the Fed to modulate its supply of central bank money, downwards as well as upwards, in periods of pressure on short-term market rates. In the current context of abundant central bank liquidity and limited supply of government securities, money market funds have made considerable use of the RRP. The ability of the SRF to reduce tension in the event of a drying up of central bank liquidity could, however, be countered by various factors such as the leverage constraints to which primary dealers and banks are subject.
In September 2021 a slight acceleration in lending to eurozone non-financial companies (NFCs), which rose 2.1% y/y from 1.9% in June, interrupted the deterioration of the credit impulse (which reflects the year-on-year change in outstanding loans). However, this remained negative (-1.4% in September, from -1.9% in June) due to a high basi of comparison.
The US banking system’s exposure to the Eurozone has significantly increased since 2016, the year of the referendum in favour of the UK’s exit from the European Union. Between 31 March 2016 and 30 June 2021, claims of the eight biggest US banks1 on Eurozone2 residents (excluding the public sector) have grown by more (USD 125.6 billion) than claims on the UK economy have fallen (USD 56.3 billion). The main beneficiaries of this switch include France (up USD 66.3 billion, or +47%), Luxembourg (up USD36.5 billion, +97%), Ireland (USD 28.8 billion, +46%) and Germany (USD 5.8 billion, +7%). Most of this expansion has been concentrated at Goldman Sachs and JP Morgan.US banks’ cross-border exposure to the Eurozone (i.e
In response to the Covid-19 pandemic, the US Congress set up the Paycheck Protection Program (PPP) in April 2020 to provide loans backed by the Federal government to small and medium-sized enterprises (SME). When subscriptions closed on 31 May 2021, about USD 800 bn in PPP loans had been issued. Banks originated 80% of these loans and non-banking lending companies and fintechs issued the remaining 20%. Several aspects of this programme differ from France’s state-backed loan programme (PGE), especially its fiscal cost. First, in the United States, the Federal government fully covers the credit risk associated with government-guaranteed loans1. Second, American lenders receive fees to compensate for the cost of originating PPP loans (between 1% and 5% depending on the principal amount)
On 28 July, the US Federal Reserve (Fed) announced that it would establish a Standing Repo Facility (SRF). Each eligible counterparty* will now be able to borrow, every business day and on an overnight basis, up to USD 120 billion of central-bank liquidity as part of the SRF**. Operations will bear interest at the marginal lending facility rate (25bp) and be capped at USD 500 billion.The SRF gives the Fed a new tool for detecting possible central-bank money shortages. In September 2019, the system was introduced on an emergency basis and temporarily, and helped to ease the repo markets crisis
