Staff Reports
Banks’ Balance-Sheet Costs, Monetary Policy, and the ON RRP
Number 1041
December 2022 Revised July 2024

JEL classification: G10, G21, E41, E51, E58

Authors: Gara Afonso, Marco Cipriani, and Gabriele La Spada

We show that banks’ balance-sheet costs have important effects not only on banks, but also on nonbank financial institutions. We use the increase in banks’ balance-sheet costs caused by the expiration of the Supplementary Leverage Ratio (SLR) relief of 2020-2021 as a quasi-natural experiment. Around the end of the relief, money market funds (MMFs) affiliated with banks subject to the SLR experienced large inflows, as these banks had an incentive to shed depositors to save on balance-sheet space and pushed them into affiliated funds. Moreover, as banks reduced their supply of wholesale debt to shrink their balance sheets, MMFs with limited investment options shifted their portfolios toward the Overnight Reverse Repo (ONRRP) facility, a program through which MMFs invest with the Federal Reserve at a fixed rate. These two effects combined explain the dramatic increase in ONRRP take-up, which reached $2.4 trillion in 2022. The impact of balance-sheet costs on MMF ONRRP investment holds when we control for the other two drivers of ONRRP take-up, interest rate uncertainty and T-bill supply. Our results imply that the interaction of bank regulation and central bank balance-sheet policy impacts the size and portfolio choices of nonbank financial institutions. When nonbanks can access the central bank balance sheet, they end up holding a share of central bank liabilities, attenuating the impact of quantitative easing. When only banks have access, they must hold all the liquidity injected by the central bank, which limits their balance-sheet space; as a result, central bank balance-sheet expansions may increase nonbank intermediation, hindering financial stability.

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Author Disclosure Statement(s)
Gara Afonso
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Marco Cipriani
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Gabriele La Spada
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
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