And it’s always time to think about the interplay between monetary policy and financial regulation.
A new research piece by Zoltan Pozsar attempts to estimate the amount of deposits that could flow out of U.S. banks thanks to an interest rate rise by the Federal Reserve and the mechanics of the central bank’s new overnight reverse repo (RRP) programme. At the same time, new Basel banking rules have pushed banks to hold big buffers of high-quality liquid assets (HQLA) to cover potential outflows. As I put it in the piece: “Two grand experiments, one conducted in the technical backwaters of monetary policy and the other operating in the realm of new banking rules, are about to collide. It bears watching.”