Monetary Matters with Jack Farley Dr. Darrell Duffie on Liquidity Strains at Year-End/Quarter-End and When Fed Reserves Will No Longer Be Ample
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Dec 29, 2024 Darrell Duffie, a finance and economics professor at Stanford, dives into liquidity strains at quarter-end, exploring the complexities of SOFR/IOR spreads. He discusses how bank payment timing is a better stress predictor than spread itself. Duffie also critiques current debt-to-GDP levels and suggests the Treasury's 'stealth QE' tactics. He explains the evolving treasury strategy for short-term needs and its effects on market dynamics, alongside the implications of transitioning from LIBOR to SOFR for banks and corporate borrowing.
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Quarter-End Spreads
- Spreads between SOFR and IOR rates often spike at quarter-ends.
- This is due to foreign banks reducing balance sheets for capital requirements and US banks charging higher rates to compensate for increased demand.
Window Dressing and Bank Monitoring
- Foreign banks do window dressing at quarter-end due to capital requirements being measured then.
- US banks are monitored constantly, so they don't window dress, but they are still affected by quarter-end dynamics.
Overdrafts and Reserve Requirements
- Before 2008, banks used daylight overdrafts with the Fed for intraday payments.
- Post-financial crisis regulations require banks to maintain sufficient liquidity, increasing reserve demand.