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The Federal Reserve’s acquisition of .4 trillion of bonds since February 2020 more than doubled the size of its balance sheet. Meanwhile, commercial banks’ balance sheets expanded by about .2 trillion in aggregate. Despite similar expansions, links between the Fed’s and the banking system’s balance sheets are complex.This blog post, the first in a two-part series, describes how banks have accommodated the very large involuntary increase in their Fed reserve balances that corresponds to Fed asset purchases—first, on the asset side and, in a second post, on the liability side. In this post, I argue that Fed asset purchases did not cause banks to “de-risk” the asset side of their balance sheets. Instead, banks reacted to the lending environment they faced.On the Economy — FRBSLHave Fed
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The Federal Reserve’s acquisition of .4 trillion of bonds since February 2020 more than doubled the size of its balance sheet. Meanwhile, commercial banks’ balance sheets expanded by about .2 trillion in aggregate. Despite similar expansions, links between the Fed’s and the banking system’s balance sheets are complex.This blog post, the first in a two-part series, describes how banks have accommodated the very large involuntary increase in their Fed reserve balances that corresponds to Fed asset purchases—first, on the asset side and, in a second post, on the liability side. In this post, I argue that Fed asset purchases did not cause banks to “de-risk” the asset side of their balance sheets. Instead, banks reacted to the lending environment they faced.On the Economy — FRBSLHave Fed
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The Federal Reserve’s acquisition of $4.4 trillion of bonds since February 2020 more than doubled the size of its balance sheet. Meanwhile, commercial banks’ balance sheets expanded by about $4.2 trillion in aggregate. Despite similar expansions, links between the Fed’s and the banking system’s balance sheets are complex.This blog post, the first in a two-part series, describes how banks have accommodated the very large involuntary increase in their Fed reserve balances that corresponds to Fed asset purchases—first, on the asset side and, in a second post, on the liability side. In this post, I argue that Fed asset purchases did not cause banks to “de-risk” the asset side of their balance sheets. Instead, banks reacted to the lending environment they faced.
On the Economy — FRBSL
Have Fed Asset Purchases Reshaped Bank Balance Sheets? Part 1
William R. Emmons, assistant vice president and lead economist in the Supervision Division at the Federal Reserve Bank of St. Louis
William R. Emmons, assistant vice president and lead economist in the Supervision Division at the Federal Reserve Bank of St. Louis
https://www.stlouisfed.org/on-the-economy/2022/january/have-fed-asset-purchases-reshaped-bank-balance-sheets-part-1
This is the second part of an article that describes how banks have accommodated the very large involuntary increase in their Fed reserve balances that corresponds to Fed asset purchases. In this post, I show that banks increased their deposit funding substantially, allowing them to reduce nondeposit borrowings. “Core” deposits—deposits excluding large time deposits—also increased significantly, offset, in part, by a decline in large time deposits, which are deposits above $100,000. Concurrently, equity financing declined as a share of assets. I conclude that Fed asset purchases are not responsible directly for the surge in deposits and reduction in other liabilities and equities. Rather, both Fed and bank portfolio shifts are responses to heightened economic stress and uncertainty.Have Fed Asset Purchases Reshaped Bank Balance Sheets? Part 1Have Fed Asset Purchases Reshaped Bank Balance Sheets? Part 2
https://www.stlouisfed.org/on-the-economy/2022/feb/have-fed-asset-purchases-reshaped-bank-balance-sheets-part-2
See also
The Asset Side of the Fed’s Balance Sheet, and Credit Easing to Date
Menzie Chinn | Professor of Public Affairs and Economics, Robert M. La Follette School of Public Affairs, University of Wisconsin–Madison, co-editor of the Journal of International Money and Finance, and a Research Associate of the National Bureau of Economic Research International Finance and Macroeconomics