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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
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  
change in ownership, % points12  
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%  
0%  
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  
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  
000  
000  
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
4
4
3
3
2
2
1
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  
00  
00  
00  
00  
00  
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  
USD bn  
2
500  
Reserves with the Fed  
Total assets  
Loans*  
16000  
14000  
2000  
10000  
00  
00  
00  
00  
00  
00  
0
Lending on Fed Funds  
& repo markets*  
2000  
1
Treasuries & Agencies  
Other assets  
Private debt securities  
1
1
500  
000  
Interbank loans (incl. affiliated  
foreign banks)  
8
6
4
2
0
000  
000  
000  
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  
USD bn  
2
1
1
000  
600  
200  
Interbank debt (including affiliated foreign banks)  
1
8
6
4
2
0
0000  
000  
000  
000  
000  
Borrowing on Fed Funds & repo markets*  
reserves created by QE  
FHLB loans  
Deposits  
Other liabilities  
8
4
00  
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
7
6
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  
USD bn  
1600  
400  
Deposit-taking Institutions  
US-chartered banks  
3
000  
500  
000  
RRF & TDF  
1
2
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
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
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  
00  
00  
0
600 billion dollars in mid-2008, i.e. 49% of the  
aggregated balance sheets (excluding interbank loans)  
of these institutions 12 (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  
USD bn  
Total assets  
600 USD bn  
USD bn  
Inverted scale  
0
2
1
1
1
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
1
1
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  
00  
00  
00  
0
100 00  
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
1
1
1
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  
00  
00  
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
1
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  
00  
00  
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
1
1
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  
00  
00  
0
0
5
00  
Deposits  
to US branches from  
their offices abroad  
1000  
Loans retained on balance sheet  
8
6
4
2
00  
00  
00  
00  
0
1
2
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  
00  
00  
00  
00  
00  
00  
00  
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  
-10  
Total assets: no change  
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 20  
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