QE and bank balance sheets: the American experience

QE and bank balance sheets:

the American experience

Céline Choulet

At the start of the year, the European Central Bank securitisations coupled with reduced tendency to rely on

launched a quantitative easing programme, consisting of US money-market funds), resident banks modified the

purchases of government bonds in the secondary “natural” effect of quantitative easing on the size of their

market. Such an approach is intended to counter balance sheets, with some of them (US-chartered

deflationary pressures, as it tends to increase directly banks) reducing it, while others (US branches of foreign

the money supply (mainly resident customers’ deposits) banks) increased it. These strategies are reflected in the

and thus to offset the lack of bank lending, the usual contrasting movements in the net due of resident banks

conduit of monetary creation. Since only credit to their subsidiaries, branches or parent companies

institutions hold accounts with the central bank, any established outside the United States. The result is a

purchase of assets by the central bank transits through shift in the ownership structure of reserves with the Fed,

the balance sheet of a bank and therefore automatically with no equivalent distortion of the customer deposits on

swells the monetary base (banknotes, coins, credit the liabilities side of banks’ balance sheets. As the

institutions’ reserves with the central bank). When the balance sheet adjustments of some offset those of

central bank buys securities from an insurance others, the resultant net effect at aggregate level may

company, a pension fund, or any other non-bank agent, have disguised these opposing strategies. The Fed’s

the commercial bank, which plays the role of measures to drain off excess reserves introduced at the

intermediary, credits the account of its client (money end of 2013 should rebalance the ownership structure of

supply) and sees its reserves with the central bank reserves.

credited by the same mount (monetary base). A

quantitative easing programme will therefore have a

significant impact on bank balance sheets.

The US quantitative easing experience is instructive Quantitative easing and banks’

in at least two respects: not only does it provide a

balance sheets: the mechanics

pedagogical illustration of these mechanisms, but it also

demonstrates that the effects of such an approach may

In the United States, the Federal Reserve (Fed)

maintained a quantitative easing (QE) policy for nearly

six years (from December 2008 until March 2010, from

November 2010 until June 2011, from October 2012

until October 2014), consisting of three waves of asset

purchases (US Treasuries, debt securities and

mortgage-backed securities – MBSs – issued by the

Agencies ) in the secondary market . This policy

automatically inflated the central bank’s balance sheet,

boosting its securities portfolio on the assets side and

the current accounts of resident banks on its liabilities

not be as automatic and uniform as expected. In this

article, we analyse how the tightening of banking

regulations and aversion towards securitised products

have distorted the effects of quantitative easing on the

balance sheets of US resident banks. We therefore build

on the work of Ennis and Wolman (2012), Goulding and

Nolle (2012, Kreicher, McCauley and McGuire (2013),

and McCauley and McGuire (2014).

1

2

For various reasons (change of method for

calculating the premium paid to the deposit insurance

fund, foreign banks’ decreased appetite for US

July-August 2015

Conjoncture

3

side (chart 1). The banks’ reserves with the Fed

therefore showed large surpluses compared with

minimum requirements (according to monetary policy ):

QE has swollen US resident banks' reserves at Fed

3

3000 USD bn

since the start of 2009, reserves in excess of reserve

requirements represent around 95% of banks’ current

accounts with the Fed. These purchases also

contributed to the strong growth in customer deposits

with the banks.

2

500

000

1500

000

1

5

00

0

Substantial excess reserves with the central bank

2

006

2009

2012

2015

US resident banks participated more widely in QE as

intermediaries on behalf of their customers, and were only

marginally involved in the sale of securities held on their

balance sheets. Throughout the entire period of the Fed’s

quantitative easing programme, they even expanded their

portfolios of Treasuries and Agencies. If the banks

themselves had sold their securities portfolios, QE would

simply have resulted in the conversion of assets on their

balance sheets (securities against reserves with the Fed),

with no impact on the size of their balance sheets

Chart 1

Source: Federal Reserve

Breakdown of Treasuries by ownership sector

%

of total outstanding

^c^h^aⁿ^g^eⁱⁿ^o^wⁿ^e^r^s^hⁱ^p^,^%^p^oⁱⁿ^t^s12

50%

0%

30%

4

Sept 2008

Dec 2014

Change

10

8

6

4

2

(example 1, figure 1) or on the money stock in circulation.

2

1

0%

Yet, from the end of the third quarter of 2008 until the

fourth quarter of 2014, it was mainly US households

0

-

10%

20%

30%

40%

-2

(which, in US statistics, include hedge funds and private

-4

-6

-8

equity funds), the States and local authorities, non-bank

financial institutions, notably Government-Sponsored

Enterprises (GSEs) and money-market funds, and non-

residents that reduced their holdings of Treasuries

and/or Agencies (charts 2 and 3). As these agents

Chart 2

Source: Federal Reserve

(apart from the GSEs) do not have accounts with the

Fed, the transactions were executed via banks’ balance

sheets: to settle its purchases (increase in securities

held on the asset side of its balance sheet), the Fed

credited the banks’ current accounts (buildup in banks’

excess reserves in the Fed’s liabilities and in the assets

side of the banks’ balance sheets), while the banks

credited their customers’ accounts (increase in deposits

on the liabilities side of banks’ balance sheets) (example

Change in ownership of Agency debt and MBS

USD bn)

(

Change between

Sept. 2008 & Dec. 2014

Broker-dealers

ABS issuers & REITS

GSEs

2, figure 1). All other things being equal, the Fed’s QE

Mutual funds

Pension funds

Banks

therefore tended to increase the size of the resident

banks’ balance sheets, by increasing their deposits with

the central bank and their debts to customers. Whereas

the eurozone quantitative easing programme that started

at the beginning of this year came in a context where

banks’ excess reserves were being taxed (0.20% penalty

applied to reserves in excess of required reserves), the

Fed has been paying interest on excess reserves at a rate

of 0.25% since 2008.

Money market funds

Insurers

Fed

Rest of the world

States & Local govt.

Households

-1000

-500

0

500

1000

1500

2000

Chart 3

Source: Federal Reserve

July-August 2015

Conjoncture

4

Impact of Large Scale Asset Purchases on balance sheets

Example 1: the commercial bank sells 10 securities units to the central bank

Central Bank

Commercial Bank

Customer

Assets Liabilities

Assets

Securities +10

Liabilities

Assets

Liabilities

Reserves +10

Securities -10

Reserves +10

Total assets: +10

Total assets: no change

Example 2: the commercial bank acts as an intermediary on behalf of its customer (the customer sells 10 securities units to the central bank)

Central Bank Commercial Bank Customer

Liabilities

Assets

Securities +10

Liabilities

Assets

Reserves +10

Liabilities

Assets

Reserves +10

Deposits +10

Securities -10

Deposits +10

Total assets: +10

Figure 1

In the United States, QE ultimately inflated the contracted temporarily (redemption or cancellation of

monetary base (banknotes, coins, credit institutions’ mortgage loans, fall in production of new loans),

reserves with the central bank), but also the money deposits continued to grow rapidly (chart 4). The money

4

supply (increase in residents’ deposits), a second effect (deposits) created under quantitative easing

that would have been less noticeable if just the banks, disconnected the stock of loans from the stock of bank

the GSEs (which have accounts with the Fed) and non- deposits. This phenomenon can be very simply

residents (whose deposits are not included in the money illustrated by adding to the bank loans outstanding the

supply) had sold their securities.

counterpart of the additional deposits created under QE,

i.e. the banks’ excess reserves with the Fed (dotted

curve in chart 4) (Coppola, 2014).

Constant growth in deposits despite credit contraction

As the banks mainly acted as intermediaries, the

Fed’s purchases of securities broke the link that

QE has uncoupled stocks of loans and bank

deposits

normally exists, even in an open economy, between

USD bn, balance sheet figures for commercial banks

5

(

non-securitised) loans and bank deposits (excluding

12000

Deposits

10000

interbank debts and loans). In normal times, at the level

of a national banking system, this close relationship

stems from the specific characteristics of financing via

bank loans: when a bank grants a loan, it creates a new

deposit at the same time. In other words, it creates

money by crediting its customer’s account. This deposit

may “travel” towards a current account held by the

customer of a different bank (e.g. when the borrower

buys a car from the customer of another bank), but at

aggregate level, loans and deposits outstanding remain

Loans retained on balance sheets

8

6

4

2

000

0

Loans + excess reserves with the Fed

QE has swollen

deposits & reserves on

bank balance sheets

7

3

80

87

94

01

08

15

Chart 4

Source: Federal Reserve

in balance (leaving aside the conversion of deposits into Shift in the ownership structure of reserves

banknotes, or their “leakage” abroad). In the US, the

Fed’s quantitative easing programme undermined the

An analysis at aggregate level of the impact of QE

illustration of the adage that “loans create deposits”. on banks’ balance sheets nevertheless masks some

6

From the end of 2008, while banks’ outstanding loans major disparities between resident establishments .

July-August 2015

Conjoncture

5

Based on an analysis of individual data, Ennis and

Wolman (2012) showed that the different monetary

Stable resources grew twice as

policy measures implemented by the Fed (loans to fast as reserves on US banks’

establishments at the end of 2008, first and second

waves of securities purchases) had led to a shift in the

balance sheets

ownership structure of reserves within the resident

As we mentioned above, purchases of securities by a

banking sector. In fact, while they accounted for less

central bank may be accompanied by an increase in the

than 10% of bank assets in September 2008, US

level of resources considered the most stable (deposits) on

branches of foreign banks captured 40% of the

banks’ balance sheets, but also by an increase in the size

of banks’ balance sheets. According to Ennis and Wolman

additional reserves created throughout the period of QE

(from Q3 2008 until Q4 2014), but just 8% of deposits

(2012) and Kreicher, McCauley and McGuire (2013), this

(chart 5).

second effect became problematic for US-chartered banks

during the second phase of quantitative easing (QE2):

when the Fed announced in November 2010 its intention to

buy an additional 600 billion dollars of Treasuries in the

secondary market, the FDIC at the same time expanded

the basis for calculating the premium paid by affiliated

banks (in accordance with the recommendations of the

Dodd Frank Act). From April 2011, the calculation basis

was extended to all the deposit-taking institution ’s liabilities

US branches of foreign banks have captured

0% of the excess reserves created by the Fed

4

3

2

1

5% Weight of US branches of foreign banks

in resident banking sector

0%

5%

As % of financial assets

0%

As % of reserves at Fed

5%

(excluding shareholders’ funds) as against just resident

0%

5%

0%

As % of client deposits

customers’ deposits previously. In addition, the premium

rate became dependent on the bank’s financial solidity

(CAMEL rating) and debt structure. Thus, the FDIC ’s new

premium calculation rule reinforced the leverage constraint

by increasing the regulatory costs associated with balance

sheet size just when a new wave of asset purchases was

being launched. Kreicher, McCauley and McGuire (2013)

demonstrated that the effects of the size and structure of

5

0

%

avg.2000-2007

avg.2008-2015

Chart 5

Source: Federal Reserve

For various reasons (changed method for the balance sheet had played more strongly to the

calculating premium paid to deposit insurance fund disadvantage of the big banks, which tried to reduce their

(FDIC), decreased appetite for US securitisations, reliance on wholesale funding. For our part, we interpret

desire to reduce dependency on US money-market QE2 as an opportunity for the US-chartered banks to repay

funds, etc.) the US resident banks modified the loans from their foreign subsidiaries and branches, and thus

“natural” effect of QE on the size of their balance to reduce the cost of the deposit insurance.

sheets (as described above): the US-chartered banks

attenuated the effect (second part of this article), while Regulatory arbitrage and Eurodollar market

the US branches of foreign banks intensified it (third

part). These strategies are reflected in the contrasting

Since the 1970s, the big US-chartered banks have

movements in the intragroup net debt of resident been transferring part of the deposits they take from

banks compared with their branches or parent corporations or funds to their branches outside the

companies established outside the United States. As United States, generally in London or the Caribbean

the adjustments of some offset the adjustments of (Kreicher, 1982). These transfers represented a form of

others, the resultant net effect at aggregate level regulatory arbitrage comparable to that which triggered

disguises these opposing trends (fourth part). The credit disintermediation, and they underpinned a rise in

7

Fed’s measures to drain off excess reserves the Eurodollar market (dollar-denominated deposits on

(

according to monetary policy) introduced at the end of the balance sheet of a bank established outside the

8

2

013 should rebalance the ownership structure of United States or an International Banking Facility )

reserves (fifth part).

(Goodfriend, 1998; He and McCauley, 2012). The

July-August 2015

Conjoncture

6

branch booked this deposit as a liability with regard to its The effects of changing the FDIC premium calculation

customer and as asset with regard to its parent

company in the United States. The latter booked a

At the end of 2010, the enlargement of the calculation

liability with regard to its branch and increased its basis to total assets and the introduction of a penalty in

reserves with the Fed (Windecker, 1993). Once proportion to their reliance on wholesale funding prompted

transferred, such deposits eluded Regulation Q on the the banks to repay their debts to their foreign subsidiaries or

payment of interest on deposits (interest ceiling on branches. Since intergroup loans had fallen within the scope

savings accounts and term deposits until 1986 and ban of the resources used to calculate the premium, there was

on paying interest on demand deposits until 2011), and less justification for US-chartered banks to replace customer

reserve requirements. In addition, they were removed deposits with intragroup debts. The launch of QE2, and the

from the calculation basis for the premium paid to the boost to reserves that it triggered, enabled the US-chartered

FDIC. This transaction enabled US-chartered banks to banks to repay this debt. The decline in intragroup debt was

remain competitive with the high returns offered by the accompanied by an increase in deposits held on the balance

non-banks (notably the mutual funds in the 1970s and sheet (“destruction” or repatriation of Eurodollars), specifically

1980s) and to improve their net margin on resources by at the big banks. Based on data from the Bank for

reducing the regulatory costs associated with deposit International Settlements (BIS) and the FFIEC ’s Call Reports,

taking. This boosted the net debtor position of the US- McCauley and McGuire (2014) demonstrated that, in a

chartered banks to their foreign subsidiaries and symmetrical fashion, the dollar exposure of their foreign

branches (charts 6 and 7).

subsidiaries or branches (deposits net of loans to customers)

declined significantly between the start of 2011 and the end

of 2012. In October 2012, the net debt of US-chartered banks

to their corresponding foreign entities was virtually zero,

compared with around 590 billion dollars at its peak in

September 2009. In just three years, the US-chartered

commercial banks therefore repaid debts that had been

accumulating over nearly thirteen years (chart 7). For the

same reasons (FDIC premium, leverage constraint, reserves

in excess of reserve requirements), activity in the federal

Transactions of US-chartered banks with foreign

affiliates

9

8

7

6

5

4

3

2

1

00 USD bn

00

Due to foreign affiliates

00

0

Due from foreign affiliates

9

funds market dried up, particularly in the interbank market

(non-collateralised or collateralised). Ultimately, the effect of

quantitative easing on the US-chartered banks was that

growth in deposits (net of loans) was twice as fast as growth

in reserves (charts 8 and 9). The result was an increase in

deposits as a percentage of US-chartered commercial banks’

total assets, well above European levels (chart 10).

8

6

90

94

98

02

06

10

14

Chart 6

Source: Federal Reserve

US-chartered banks' net funding inflows from

offices abroad

Financial assets of US-chartered commercial banks

7

6

5

4

3

2

1

00 USD bn, net due to related foreign offices

USD bn

2

500

Reserves with the Fed

Total assets

Loans*

16000

14000

2000

10000

00

0

Lending on Fed Funds

& repo markets*

2000

1

Treasuries & Agencies

Other assets

Private debt securities

1

500

000

Interbank loans (incl. affiliated

foreign banks)

8

6

4

2

0

000

5

00

0

7

5

80

NB: a figure greater than 0 indicates that US banks are net

borrowers from their foreign subsidiaries and branches

Source: Federal Reserve

85

90

95

00

05

10

15

-

100

200

80

85

90

95

00

05

10

15

*

Excluding interbank loans

Chart 7

Chart 8

Source: Federal reserve

July-August 2015

Conjoncture

7

Financial liabilities of US-chartered commercial

banks

The US branches of foreign banks

12000 have captured 40% of the excess

USD bn

2

1

000

600

200

Interbank debt (including affiliated foreign banks)

1

8

6

4

2

0

0000

000

Borrowing on Fed Funds & repo markets*

reserves created by QE

FHLB loans

Deposits

Other liabilities

8

4

00

0

The second phase of quantitative easing was

accompanied by a shift in the ownership structure of

reserves at the central bank (chart 11) without an

equivalent shift in the ownership structure of deposits

(chart 5). In March 2011, the US branches of foreign

banks held 640 billion dollars of reserves (40% of their

balance sheet), double the level of the previous year.

The weight of their reserves jumped to 46% of the

reserves of all deposit-taking institutions (40% on

80

85

90

95

00

05

10

15

*

Excluding interbank borrowings

Chart 9

Source: Federal Reserve

Deposits cover 3/4 of US commercial bank assets

Deposits as a % of total assets (excl. interbank loans)

8

5%

0%

5%

0%

5%

0%

5%

10

average between 2008 and 2014) compared with 2%

in June 2008 (4% on average between 2000 and

8

7

6

5

2007), a level disproportionate to their weight in total

bank assets (11% in March 2011 vs 10% three years

earlier).

Shift in the ownership structure of reserves

7

5

80

85

90

95

00

05

10

15

Chart 10

Source: Federal Reserve

USD bn

1600

400

Deposit-taking Institutions

US-chartered banks

3

000

500

000

RRF & TDF

1

2

In striving to minimise the cost of the FDIC

premium, the US-chartered banks dampened the impact

of QE on their stock of reserves and the size of their

balance sheets. This was not the case for the US

branches of foreign banks, which are mostly not

affiliated to the deposit insurance system, as they do not

take deposits from retail customers (see box) and are

therefore not required to pay the FDIC premium.

US branches of foreign banks

1200

1000

800

QE 3

1500

1000

Extension

of QE 1

QE 2

6

00

Fed lending to banks &

start of QE 1

400

200

0

5

00

0

0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Chart 11 Source: Federal Reserve

Box: Foreign banks’ branches in US statistics

International banks establish their activities abroad via subsidiaries or branches. Subsidiaries are corporate

entities that are legally distinct from their parent and are generally regulated and supervised by the authorities of the

host country, which is not the case for branches. Some countries restrict the activities of foreign banks’ branches

located in their territory, the United States being an example (see below). Canadian, UK, Japanese, French and

German institutions are among the largest foreign banks operating in US territory.

In the Fed’s statistics, the financial accounts of US depository institutions (the equivalent of credit institutions in

the eurozone) are established on a parent-company basis according to the residency principle. It follows that only the

financial assets (and liabilities) of deposit-taking institutions that are resident in US territory are entered in the

July-August 2015

Conjoncture

8

accounts (even if these institutions are controlled by foreign banks). The uses (and sources) of the banks affiliated to

them (parents, subsidiaries or branches) but located outside the United States, together with the assets (and

liabilities) of other non-resident agents, form the “Rest of the World” sector. The accounts of each of the institutional

sectors are consolidated (eg the credits and debts between resident commercial banks are netted). The data

published by the Fed (Financial Accounts of the United States, Table H8) enable us to distinguish two types of

commercial bank within the resident banking sector: 1) banks governed by US law (a subsector encompassing US-

chartered banks and US subsidiaries of foreign banks) and 2) the US branches of foreign banks.

The Fed does not draw up a separate account for the US subsidiaries of foreign banks. Nevertheless, based on

data from the FFIEC’s Call Reports, Goulding and Nolle (2012) note that their balance sheet structure is fairly similar

to that of the US-chartered commercial banks (unlike the branches: see below). Moreover, they represent a much

smaller share than the branches, accounting for one-third of the assets of foreign banks with a presence in the US,

compared with two-thirds for branches.

11

In the United States, with a few exceptions , the branches of foreign banks are not affiliated to the FDIC: they

are not authorised to take deposits from retail customers and the deposits of their clients (corporates) are not

guaranteed. These establishments obtain their funding mainly from the wholesale markets, i.e. with resources

considered to be less stable than retail customers’ deposits. Therefore, while deposits remain the main source of

funding for branches, as with the US-chartered banks, 80% of them consist of deposits that exceed the guarantee

limit (250 billion dollars) compared with less than 10% at the US-chartered banks. The rest of their debt consists of

loans from the fed funds market or the collateralised loan market (repurchase agreements or repos: cash loans in

exchange for securities with an obligation to buy them back in the future). Their loan portfolios are therefore more

oriented towards corporate clients (since the start of the 2000 decade, commercial and industrial loans outstanding

have on average accounted for 90% of their loan portfolios in the non-financial sector). Like the US-chartered

commercial banks, they can refinance themselves from the Federal Reserve and they have a current account.

A means of access to the dollar

According to BIS statistics, foreign banks’ loans to December 1999 and June 2008. These practices added

US residents (based on their consolidated balance to the “round trip” of dollar funds (He and McCauley,

sheets) amounted to more than 6,000 billion dollars 2012) and helped to inflate the balance sheets of

before the financial crisis (McCauley and McGuire, branches located in the US. The less severe regulatory

2

014). Some of the European banks among them were framework of the time (Basel 2) and the lack of

raising funds in dollars from US money-market funds constraints on size or leverage for banks regulated

mainly in the form of certificates of deposit and outside the US may have contributed to this process.

(

commercial paper) via their US branches in order to

minimise their exposure to exchange rate risks (Baba,

McCauley and Ramaswamy, 2009). These funds were

invested in long-term securities or securitisations

Transactions of US branches of foreign banks

with foreign affiliates

1

400 USD bn

1

200

(securities backed by mortgages, car loans, credit cards,

Due to foreign affiliates

Due from foreign affiliates

000

800

student loans, etc.).

From the start of the 2000 decade, net loans from

branches to their parents gradually increased, reaching

6

4

2

00

0

600 billion dollars in mid-2008, i.e. 49% of the

aggregated balance sheets (excluding interbank loans)

of these institutions ¹ ² (charts 12, 13 and 14). In a

symmetrical fashion, the deposits taken by these

branches grew by around 685 billion dollars between

8

6

90

94

98

02

06

10

14

Chart 12

Source: Federal Reserve

July-August 2015

Conjoncture

9

Financial assets of US branches of foreign banks

Reduced use of money market funds has

temporarily obscured effects of QE on deposits

USD bn

Total assets

600 USD bn

USD bn

Inverted scale

0

2

1

600

400

200

000

3500

000

2500

000

1500

Reserves with the Fed

Lending on Fed Funds &

repo markets*

3

400

00

Net due to related foreign offices

Treasuries & Agencies

200

0

400

Other assets

Private debt securities

2

800

600

400

200

0

Interbank loans (including with

affiliated foreign banks)

00

02

04

06

08

10

12

14

600

Loans*

-200

1

5

0

000

800

-

400

00

Term deposits

250 USD bn

>

1000

-600

80

85

90

95

00

05

10

15

NB: a figure less than 0 indicates that US branches

are net lenders to foreign parent companies

*

Excluding interbank loans

-800

1200

Chart 13

Source: Federal Reserve

Chart 15

Source: Federal Reserve

Financial liabilities of US branches of foreign banks

Net debt of US branches of foreign banks and

Fed reserves

USD bn

500 USD bn

USD bn 1200

1

600

400

200

000

Interbank debt (including affiliated foreign banks)

300

Net due to foreign affiliates

1000

800

600

400

200

0

Deposits

Borrowing on Fed Funds & repo markets*

Other liabilities

1

00

8

6

4

2

00

0

₁₀₀00

03

06

09

12

15

-

-300

Reserves

with the Fed

of US branches

-

500

700

80

85

Excluding interbank borrowings

Chart 14

90

95

00

05

10

15

*

Source: Federal Reserve

Chart 16

Source: Federal Reserve

From net lenders to net borrowers

These mechanisms can be illustrated by a graph

such as shown in chart 4 above. In contrast to what may

However, starting in 2011, the net position of be observed at aggregate level, simply accounting for the

branches vis-à-vis their parents changed radically: reserves created by QE does not enable us to reconcile

having been net lenders, they became net borrowers. the trend in loans and deposits booked in the balance

In one year, in absolute terms, their net position sheets of foreign banks’ branches (chart 17). Obviously,

contracted by 512 billion dollars, from a net credit of the deposits created by a new loan (or by QE) move from

376 billion in December 2010 to a net debt of 130 one bank’s balance sheet to another’s, or from one

billion in December 2011. The result was less recourse institution to another; but in the case of branches, a clear

to money-market funds, which may have obscured the disconnect between the deposits and loans on their

effect of QE on their customers’ deposits: the deposits balance sheets emerged at the start of the 2000 decade,

booked on the liabilities side of their balance sheets i.e. from the moment when they increased their net credit

therefore evolved fairly erratically and only really position vis-à-vis their parent companies (and financed

started to grow in 2012 (chart 15). From 2011, the these loans by borrowing from money-market funds,

branches amplified the effect of QE on their stock of mainly). Thus, the trends in loans and deposits on the

reserves by borrowing from their parents (chart 16). balance sheets of branches may be reconciled, at least

Thus, while the branches had captured one-third of the until just before quantitative easing, by adding to the loans

reserves created in QE1, this proportion rose to more the counterpart of the liquidity lent to the parent

than 50% in QE2 (more than two-thirds from companies, i.e. the branches’ net loans to their parent

September 2010 to September 2012).

companies (chart 18). From 2008, accounting for the

July-August 2015

Conjoncture

10

counterpart of deposits created in the context of QE, and

While foreign banks’ US branches all substantially

from 2011 for liquidity borrowed from parent companies, increased their reserves with the Fed from 2011

gives a more coherent picture of the respective trends for (particularly branches of Japanese, Swiss and UK

loans and deposits (chart 19).

banks) and reduced their net loans to their parents,

only the branches of eurozone banks reduced their

balance sheets and became net borrowers from their

parents (Kreicher, McCauley and McGuire (2013),

McCauley and McGuire (2014)). At the European

banks, a reduced appetite for US securitisations, the

Fed’s securities purchase programme, a desire to

reduce dependency on money-market funds (whose

funding proved unstable when the financial crisis

broke), as well as a desire to boost dollar-denominated

liquid assets, led to a deleveraging of bank balance

sheets in dollars (at both branch level and

consolidated level) and a shift in the assets held by the

branches (in favour of reserves with the Fed).

Therefore, while other factors may also have played a

Simply accounting for reserves does not allow

the reconciliation of stocks of loans and deposits

1

800 USD bn, balance sheet amounts at US branches

of foreign banks

600

400

200

000

Deposits

Loans retained on balance sheet

Loans + Fed reserves

8

6

4

2

00

0

7

5

80

85

90

95

00

05

10

15

Chart 17

Source: Federal Reserve

13

role , it seems that foreign banks’ reduced reliance on

the resources raised by their branches has been

accompanied by a contraction in the securitisation

portfolios held by non-residents (chart 20).

Unsurprisingly, however, the orders of magnitude are

very different: first, because the foreign banks had not

financed these purchases solely via their branches in

the US; and second, because the non-resident sector

is much larger than just the foreign banks that have US

branches. Data collected by the US Treasury and the

Federal Reserve on foreigners’ ownership (taking all

counterparties together) of securities issued by US

residents illustrates the decline in securitisation

portfolios, particularly those held by Europeans, since

the financial crisis (chart 21).

The increase in net intra-group lending has uncoupled

the stock of bank loans and deposits since 2000

1

400 USD bn, balance sheet figures for US branches

of foreign banks

200

Deposits

000

Loans retained on balance sheet

8

6

4

2

00

0

Loans + net due to foreign affiliates

7

5

80

85

90

95

00

05

10

15

Chart 18

Source: Federal Reserve

Reconciliation of outstanding loans and

bank deposits

Shrinking securitisation portfolios of non-residents

1

600

400

200

000

USD bn

Net funding inflows

USD bn, balance sheet figures for US branches

of foreign banks

USD bn

Inverted scale

6

4

2

00

0

5

00

Deposits

to US branches from

their offices abroad

1000

Loans retained on balance sheet

8

6

4

2

00

0

1

2

500

000

500

Loans + net due to foreign

affiliates + reserves at Fed

-

200

400

Ownership by RoW of Agency debt,

MBS & ABS

-600

-800

3000

7

5

80

85

90

95

00

05

10

15

80

85

90

95

00

05

10

15

Graph 19

Source: Federal Reserve

Chart 20

Source: Federal Reserve

July-August 2015

Conjoncture

11

Shrinking of portfolios of US securitisations owned

by Europeans

short-term liquidity norm (LCR, liquidity coverage

ratio) . This requires banks to hold enough liquid,

unencumbered, high-quality assets to cover the net

cash outflows triggered by a serious 30-day crisis. The

assets considered to be the most liquid (those that can

be converted into cash in private markets without losing

14

USD bn, portfolios of US long-term debt securities

1

000

(excl. Treasuries) owned by Europeans

9

8

7

6

5

4

3

2

1

00

0

ABS (excl. MBS) from private issuers

MBS from private issuers

MBS from Agencies

Agency debt

–

or losing very little of – their value) include reserves at

the central bank and debt instruments issued – or

guaranteed – by sovereigns, such as Treasuries and

15

0

6/07 06/08 06/09 06/10 06/11 06/12 06/13 06/14

Agencies . The US-chartered banks expanded their

portfolios of Treasuries and Agencies by nearly 320

billion dollars between the end of 2012 and March 2015

ABS: Asset-backed securities; MBS: Mortgage-backed securities;

Mortgage agencies: Federal agencies (Ginnie Mae)

&

GSEs (Fannie Mae, Freddie Mac, FHLB)

Chart 21 Sources: US Treasury,Federal Reserve of New York,Fed

(chart 8), purchases that they financed by borrowing

from their foreign branches or subsidiaries (+260 billion)

and the Federal Home Loan Banks (+90 billion)

Net inflow of funds via crossborder (chart 9).

All in all, the net debt of all commercial banks

resident in the US to their parent companies,

subsidiaries and branches abroad amounted to around

intragroup debt

Apart from their primary purpose (providing access

to funding in foreign currencies, ensuring geographical

diversification for commercial activities and investments,

etc.), foreign branches are also factors that allow for the

absorption or amplification of shocks. Thus, while an

analysis of the aggregated balance sheets of resident

banks allows us to assess the effects of quantitative

easing on banks’ reserves and deposits (see first part of

this article), it ignores the massive shift in net intra-group

positions that QE has triggered.

As the net debt of some (the US banks) offsets the

net credits of others (the branches of foreign banks), the

net position of US domestic commercial banks to their

foreign parent companies, subsidiaries and branches

remained close to zero until the end of 2010 (see area

shown in chart 22).

4

00 billion dollars at the start of 2015 (see area shown

16

in chart 22) . Based on the consolidated balance

sheets of foreign banks with activities in the US (FFIEC

Call Reports) and statistics from the BIS, McCauley and

McGuire (2014) observed that in 2011 the increase in

net lending in dollars by foreign parent companies to

their US branches had not been offset by a contraction

of the same order in their net loans to any other

counterparty (in the US or elsewhere). They deduced

from this that this lending had been financed by

converting foreign currency-denominated resources into

dollars. This interpretation was confirmed by the

increase in yen, euro and sterling swaps into dollars

during 2011. They thus concluded that, counter-

intuitively, the Fed’s QE had been accompanied by an

inflow of funds via the Eurodollar market.

Under the combined effect of quantitative easing

and the change to the FDIC premium calculation, the

flow of parent companies’ repayments of crossborder

intra-group loans, which was more rapid at the

foreign banks than at the US-chartered banks (see

area shown in chart 6 and histogram in chart 12),

helped to increase the net debt of all the resident

commercial banks. This trend was prolonged by the

net inflow of intragroup funds via the balance sheets

of US branches of foreign banks as from 2011, and

via those of US-chartered commercial banks as from

Net debt of some offset by net credits of others

over the long term

USD

bn

Net debt of US resident commercial

banks to foreign affiliated entities

Net inflow of

intra-group

finance

800

600

400

200

0

Net debt of US-chartered banks to

foreign subsidiaries and branches

Net debt of US branches of foreign

banks to foreign affiliates

-

200

2

013 (dotted curve and solid curve in chart 22).

-400

NB: figures greater than 0 indicate that

-

600 banks are net borrowers from foreign affiliates

parent companies, subsidiaries, branches, other)

80 85 90 95 00 05

Net outflow of

intra-group

finance

The trend observed since 2013 for US-chartered

(

800

banks (return to net debtor position) is probably not

unrelated to the Basel Committee’s finalisation of the

7

5

10

15

Chart 22

Source: Federal Reserve

July-August 2015

Conjoncture

12

The Term Deposit Facility (TDF)

Towards a rebalancing of the

reserve ownership structure

This method consists in offering to convert banks’

reserves into term deposits (figure 2). To make this more of

an incentive than it was when launched in September 2013,

the Fed made a timely change as from October 2014 to the

characteristics of the term deposits that the banks may take

up under TDF. The initial offers had in fact been in breach of

banking regulations: in October 2013, the proposed LCR

short-term liquidity rule (see above) stated that term deposits

offered under TDF would be ineligible for the range of liquid

assets covered by the LCR. This rule, which indicated that

part of the term deposits could meet the inclusion criteria

provided that early withdrawals were authorised, was

finalised in September 2014; shortly afterwards, in October,

the Fed announced the introduction of new term deposit

offers at 6, 7 or 8 days, but this time with early drawing rights.

The unprecedented increase in banks’ excess

reserves triggered by quantitative easing exerted

17

downward pressure on money-market rates . Eager

18

to regain control over short-term rates , the Federal

Reserve has been testing two alternative methods for

draining off excess reserves: the Term Deposit

19

Facility (TDF) and the Reverse Repo Facility (RRF)

since September 2013. The resulting contraction in

reserves is only perceptible at the US branches of

foreign banks.

Impact of the Term Deposit Facility on balance sheets : conversion of reserves into term deposits

Central Bank Commercial Bank

Liabilities Assets Liabilities

Reserves Reserves

Term deposits +10 Term deposits +10

Customer

Assets Liabilities

Assets

-10

Total assets: no change

Figure 2

This change enables banks to participate in the The Reverse Repo Facility (RRF)

scheme without causing deterioration (or

a

The second method for draining off liquidity consists

improvement) in their LCR liquidity ratio (conversion of

reserves into term deposits). Helped by a more in performing repurchase transactions on Treasuries ² ⁰

attractive return, the amounts converted reached 400 (sale with obligation to repurchase in future) at a fixed rate

(

between 0.01% and 0.10%), with a cap on the amount

billion dollars in December 2014 and again in February

015 with an interest rate of 30bp in December and permitted (30 billion dollars per counterparty since

2

September 2014 vs 500 million dollars initially in the case

of overnight transactions) and with an extended list of

counterparties: 24 deposit-taking institutions, 22 primary

dealers, 12 GSEs and 105 money-market funds. By

means of this facility, a bank or non-bank extends a

guaranteed loan (cash against Treasuries) to the Fed .

As in the case of the purchase of securities by the Fed, a

repo transaction always (unless the counterparty is a

GSE) passes through a bank’s balance sheet, whether

the counterparty is a final counterparty of the Fed

2

8bp in February, compared with 25bp for excess

reserves (chart 23).

Participation in the Fed's two programmes is

substantial

21

USD bn

4

3

1

50

00

50

0

Term Deposit Facility

Reverse Repo Facility

(example 1 in figure 3) or not (example 2 in figure 3),

since only banks and GSEs have a current account with

the central bank. At the end of the transaction, the size of

the central bank’s balance sheet is unchanged, but the

composition of its debt is different (reverse repos versus

2

013

2014

2015

22

reserves) and the account of its counterparty is debited

Chart 23

Source: Federal Reserve

July-August 2015

Conjoncture

13