Under the QEP [Quantitative Easing Policy], financial institutions have increased their dependence on the BOJ’s [Bank of Japan] money market operations as a means of adjusting their reserve balances. The financial institutions with a funds shortage have become more dependent on the BOJ’s funds-providing operations, while those with a funds surplus have come to use the BOJ’s funds-absorbing operations as a means of investing funds. Put differently, the BOJ has come to play the role of a money broker. This is the mechanism through which the BOJ has provided ample liquidity. However, when concerns over the financial system’s stability have receded and the precautionary demand for liquidity has declined, the BOJ has often faced difficulties in its attempt to supply liquidity. Specifically, it has experienced undersubscriptions in fund-providing operations: the total amount of bids have fallen short of the amount offered by the BOJ even at the lowest bidding interest rate of 0.001%.
More importantly:
As financial institutions have become more dependent on the BOJ’s money market operations, the size of the call market [...] has contracted further [...] This reduction in the size of the call market reflects lowered trading incentives for the following two reasons: first, the returns on investment in the call market have declined to a level that cannot cover trading costs [...]. Second, credit spreads have been narrowed substantially. A call rate of 0.001% means that the average of all borrowing rates is 0.001%, leaving little room for differences in rates between individual borrowers.
While the second reason may not hold under current conditions (credit spreads have substantially widened since Lehman), the first one is striking: when a central bank wants financial institutions to lend again to each other, policy rates at zero bound may be detrimental!
Posts
4 Kommentare:
P.S.: Meanwhile, the FED has decided to limit the scope for future decreases in its Target Rate to almost nothing. Maybe it thinks that the interbank money market is obsolete.
With interest rates down to zero, the only thing left to do for the Fed is quantitative easing. Here's a diagrammatic explanation.
The FT reports that FED policy indeed has such unintended effects in the repo markt.
The FT article above is not publicly available. Here is another version that is.
Kommentar veröffentlichen