Sebastian Infante, Federal Reserve Board of Governors
Victoria Ivashina, Harvard University
Abstract: This paper examines the role of repo lending between counterparties affiliated with the same bank holding company (BHC). Using confidential transaction-level data, we find that Treasury repo rates between affiliated entities are significantly higher than those between unaffiliated parties. This affiliation premium is more pronounced when dealers face tighter balance sheet constraints, suggesting that regulatory capital requirements raise the cost of external borrowing and enhance the value of internal funding. During a temporary period of regulatory relief—when leverage requirements were relaxed—the affiliation premium nearly disappeared, only to re-emerge once the regulations were reinstated. Our findings underscore a unique competitive advantage for dealers within large BHCs: the ability to access internal liquidity from affiliated banks. This internal liquidity channel also facilitates the distribution of liquidity from banks with high level of reserves to the rest of financial system.
Abstract: Bank trading desks earn profits from intermediating customer trading volume. Across a broad set of asset markets, we document that the trading desks of large U.S. dealer banks behave as financial intermediaries that profit from toll-taking as in Duffie et al. (2005). Despite having large inventories and earning large profits, bank trading desks bear little to no market risk. Risk is primarily idiosyncratic and diversifies across desks, resulting in high profitability, profits per unit of risk. In the cross-section of large U.S. dealer banks, the profitability of trading desks differs, even within the same asset class and trading activity. Trading desks exhibit economies of scale, where profitability is increasing in trading desk size.
Discussant: Haoxiang Zhu, Massachusetts Institute of Technology
Abstract: This paper studies how foreign banks affect reserve demand and balance sheet normalization under the Federal Reserve’s ample-reserves framework. Although foreign banks account for a small share of U.S. banking activity, they hold a disproportionate share of reserve balances. Using regulatory data and high-frequency reserve supply shocks, we document pronounced heterogeneity in reserve management across banks and a strong QE–QT asymmetry: foreign banks absorb most reserve inflows during QE but do not symmetrically release reserves during QT, shifting adjustment toward large domestic banks and the ONRRP facility. We decompose foreign bank reserve demand into a spread-sensitive arbitrage buffer and a structural component anchored by internal capital markets and global interest rate differentials. Embedding these mechanisms in a heterogeneous-demand model, we show that uncertainty about foreign banks’ reserve behavior raises the reserve buffer required for effective interest rate control during balance sheet normalization.
Discussant: Wenhao Li, University of Southern California
Andreas Fuster, École Polytechnique Fédérale de Lausanne
Teodora Paligorova, Federal Reserve Board of Governors
James Vickery, Federal Reserve Bank of Philadelphia
Abstract: We use bond-level data to study how US banks managed securities portfolio risk during the 2022–23 interest rate surge. Rising yields lengthened the effective duration of callable bonds (especially agency MBS) and triggered deposit outflows. Exposed banks reduced both the volume and duration of bond purchases, but rarely sold existing bonds and did not expand qualified accounting hedges. Two frictions constrain adjustment: first, banks systematically avoid realizing losses, especially banks that exclude unrealized losses from regulatory capital. Second, hedging capacity is limited by fixed costs and callable bond complexity. Instead, banks reduced measured exposure by classifying high-risk bonds as held-to-maturity.
