2012년 5월 2일 수요일

[자료] Chapter 2. FEDERAL FUNDS (리치몬드 연준, 1998)

출처: Federal Reserve Bank of Richmond(Richmond, Virginia), 1998
지은이: Marvin Goodfriend and William Whelpley
※ A caution to readers: The information in this chapter was last updated in 1993. Since the money market evolves very rapidly, recent developments may have superseded some of the content of this chapter.

CF. 기타 참고자료:
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Chapter 2. Federal Funds

※ 발췌: 

(... ...) This chapter explains federal funds as a credit instrument, the funds rate as an instrument of monetary policy, and the funds market itself as an instrument of regulatory policy.


CHARACTERISTICS OF FEDERAL FUNDS

Three features taken together distinguish federal funds from other money market instruments[:]
  • First, they are short-term borrowings of immediately available money—funds which can be transferred between depository institutions within a single business day. In 1991, nearly three-quarters of federal funds were overnight borrowings. The remainder were longer maturity borrowings known as term federal funds. 
  • Second, federal funds can be borrowed by only those depository institutions that are required by the Monetary Control Act of 1980 to hold reserves with Federal Reserve Banks. They are commercial banks, savings banks, savings and loan associations, and credit unions. Depository institutions are also the most important eligible lenders in the market. The Federal Reserve, however, also allows depository institutions to classify borrowings from U.S. government agencies and some borrowings from nonbank securities dealers as federal funds.[주1]
  • Third, federal funds borrowed have historically been distinguished from other liabilities of depository institutions because they have been exempt from both reserve requirements and interest rate ceilings.[주2]
The supply of and demand for federal funds arise in large part as a means of efficiently distributing reserves throughout the banking system. On any given day, individual depository institutions may be either above or below their desired reserve positions. Reserve accounts bear no interest, so banks have an incentive to lend reserves beyond those required plus any desired excess. Banks in need of reserves borrow them. The borrowing and lending take place in the federal funds market at a competitively determined interest rate known as the federal funds rate.

The federal funds market also functions as the core of a more extensive overnight market for credit free of reserve requirements and interest rate controls. Nonbank depositors supply funds to the overnight market through repurchase agreements (RPs) with their banks. Under an overnight repurchase agreement, a depositor lends funds to a bank by purchasing a security, which the bank repurchases the next day at a price agreed to in advance. In 1991, overnight RPs accounted for about 25 percent of overnight borrowings by large commercial banks. Banks use RPs to acquire funds free of reserve requirements and interest controls from sources, such as corporations and state and local governments, not eligible to lend federal funds directly. In 1991, total daily average gross RP and federal funds borrowings by large commercial banks were roughly $200 billion, of which approximately $135-140 billion were federal funds.

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METHODS OF FEDERAL FUNDS EXCHANGE

Federal funds transactions can be initiated by either the lender or the borrower. An institution wishing to sell (loan) federal funds locates a buyer (borrower) directly through an existing banking relationship or indirectly through a federal funds broker. Federal funds brokers maintain frequent telephone contact with active funds market participants and match purchase and sale orders in return for a commission. Normally, competition among participants ensures that a single funds rate prevails throughout the market. However, the rate might be tiered so that it is higher for a bank under financial stress. Moreover, banks believed to be particularly poor credit risks may be unable to borrow federal funds at all.

Two methods of federal funds transfer are commonly used[:]
  • To execute the first type of transfer, the lending institution authorizes the district Reserve Bank to debit its reserve account and to credit the reserve account of the borrowing institution. Fedwire, the Federal Reserve System's wire transfer network, is employed to complete a transfer.
  • The second method simply involves reclassifying respondent bank demand deposits at correspondent banks as federal funds borrowed. Here, the entire transaction takes place on the books of the correspondent. To initiate a federal funds sale, the respondent bank simply notifies the correspondent of its intentions. The correspondent purchases funds from the respondent by reclassifying the respondent's demand deposits as "federal funds purchased." The respondent does not have access to its deposited money as long as it is classified as federal funds on the books of the correspondent. Upon maturity of the loan, the respondent's demand deposit account is credited for the total value of the loan plus an interest payment for use of the funds. The interest rate paid to the respondent is usually based on the nationwide average federal funds rate.

TYPES OF FEDERAL FUNDS INSTRUMENTS

The most common type of federal funds instrument is an overnight, unsecured loan between two financial institutions. Overnight loans are, for the most part, booked without a formal, written contract. Banks exchange oral agreements based on any number of considerations, including how well the corresponding officers know each other and how long the banks have mutually done business. Brokers play an important role by evaluating the quality of a loan when no previous arrangement exists. Formal contracting would slow the process and increase transaction costs. The oral agreement as security is virtually unique to federal funds.

Federal funds loans are sometimes arranged on a longer-term basis, e.g., for a few weeks. Two types of longer-term contracts predominate—term and continuing contract federal funds. A term federal funds contract specifies a fixed term to maturity together with a fixed daily interest rate. It runs to term unless the initial contract explicitly allows the borrower to prepay the loan or the lender to call it before maturity.


Continuing contract federal funds are overnight federal funds loans that are automatically renewed unless terminated by either the lender or the borrower. This type of arrangement is typically employed by correspondents who purchase overnight federal funds from respondent banks. Unless notified by the respondent to the contrary, the correspondent will continually roll the interbank deposit into federal funds, creating a longer-term instrument of open maturity. (... ...)


DETERMINATION OF THE FEDERAL FUNDS RATE

To explain the determinants of the federal funds rate, we present a simple model of the market for bank reserves. In this model, which incorporates the actions of both private banks and the Federal Reserve, the funds rate is competitively determined as that value which equilibrates the aggregate supply of reserves with the aggregate demand for reserves.[주3]

The aggregate demand for bank reserves arises from the public's demand for checkable deposits against which banks hold reserves. The aggregate quantity of checkable deposits demanded by the public falls as money market interest rates rise. Hence, the derived demand for bank reserves is negatively related to market interest rates. The aggregate demand schedule for bank reserves is shown in Figure 1, where f is the funds rate and R is aggregate bank reserves.[주4]
[주4] The analysis here presumes that reserve demand is related contemporaneously to bank deposits. Required reserves were held on a lagged basis between 1968 and 1984, but they have been held contemporaneously since then. For a historical discussion of the role of reserve requirements in implementing monetary policy, see Goodfriend and Hargraves (1983).
The aggregate stock of reserves available to the banking system is determined by the Federal Reserve. In principle, the Federal Reserve could choose to provide the banking system with a fixed stock of reserves. If the Federal Reserve chose this strategy, a fixed stock of reserves, <R upper bar>, would be provided through Federal Reserve purchases of government securities. The resulting funds rate would be f * in Figure 1, or the rate that equilibrates the aggregate supply of and the aggregate demand for bank reserves.


Such a Federal Reserve operating procedure, known as total reserve targeting, is the focus of textbook discussions of monetary policy. The hallmark of total reserve targeting is that shifts in the market's demand for reserves are allowed to directly affect the funds rate. In practice, however, the Federal Reserve has never targeted total reserves. Instead, it has adopted operating procedures designed to smooth movements in the funds rate against unexpected shifts in reserve demand.5 The simplest smoothing procedure is federal funds rate targeting, which involves selecting a narrow band, perhaps 50 basis points or less, within which the funds rate is allowed to fluctuate. Explicit federal funds rate targeting was employed by the Federal Reserve during the 1970s.

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Federal Reserve operating procedures become more complicated when reserves are provided by bank borrowing at the Federal Reserve's discount window. Figure 2 shows the relationship between the provision of reserves and the federal funds rate when there is discount window borrowing. The locus has a vertical segment and a nonvertical segment because reserves are provided to the banking system in two forms, as nonborrowed and as borrowed reserves. Nonborrowed reserves (NBR) are supplied by the Federal Reserve through open market purchases, while borrowed reserves (BR) are provided by discount window lending.

[Figure 2]

The distance between the vertical segment of the reserve provision locus and the vertical axis is determined by the volume of nonborrowed reserves. The reserve provision locus is vertical up to the point where the funds rate ( f ) equals the discount rate (d) because, when the funds rate is below the discount rate, banks have no incentive to borrow at the discount window. Conversely, when the funds rate is above the discount rate, borrowers obtain a net saving on the interest cost of reserves. This net saving consists of the differential ( f -d ) between the funds rate and the discount rate. In administering the discount window the Federal Reserve imposes a noninterest cost of borrowing which rises with volume: higher borrowing increases the likelihood of costly Federal Reserve consultations with bank officials. Banks tend to borrow up to the point where the expected consultation cost of additional borrowing just offsets the net interest saving on that borrowing. Consequently, borrowing tends to be greater the larger the spread between the funds rate and the discount rate. Hence, the reserve provision locus is positively sloped for funds rates above the discount rate.


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THE FEDERAL RESERVE, THE FEDERAL FUNDS RATE, AND MONEY MARKET RATES

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HISTORY OF THE FEDERAL FUNDS MARKET


Federal funds were traded in New York as early as the summer of 1921, though trading volume was initially small, rarely exceeding $20 million a day.[주10]  By 1928 the volume of federal funds trading had risen to $100 million per day. In April of that year an article appeared in the New York Herald Tribune announcing the inclusion of the federal funds rate in the Tribune's daily table of money market conditions.[주11]

As the Tribune described it, a federal funds transaction involved the exchange of a check drawn on the clearinghouse account of the borrowing bank for a check drawn on the reserve account of the lending bank. The reserve check cleared immediately upon presentation at the Reserve Bank, while the clearinghouse check took at least one day to clear. The practice thereby yielded a self-reversing, overnight loan of funds at a Federal Reserve Bank; hence, the name federal funds. By 1930, the means of trading federal funds had expanded to include wire transfers and other methods.12

The emergence of federal funds trading constituted a financial innovation allowing banks to minimize transactions costs associated with overnight loans. By their very nature, federal funds could be lent by member banks only, since only member banks held reserves at Reserve Banks. The beneficiaries on the borrowing side were also member banks, which could receive funds immediately through their Reserve Bank accounts. Federal funds offered member banks a means of avoiding reserve requirements on interbank deposits if they could be classified as "money borrowed" rather than deposits.

In September 1928 the Federal Reserve Board ruled that federal funds created by the clearing of checks as described above should be classified as nonreservable money borrowed.13 A decision in 1930 found that federal funds created by wire transfers and other methods should also be nonreservable.14 These decisions provided the initial regulatory underpinnings for the federal funds market of today. In both the 1928 and 1930 rulings, the Board indicated that it viewed federal funds as a substitute for member bank borrowing at the Federal Reserve discount window. It argued that because discount window borrowing was not reservable, federal funds borrowing should not be either.

The Federal Reserve Board's decision to make federal funds nonreservable is best understood as a means of encouraging the federal funds market as an alternative to the two conventional means of reserve adjustment then in use: the discount window and the call loan market. Following World War I, aggregate borrowing at the Federal Reserve's discount window generally exceeded member bank reserves. At that time, the Federal Reserve did relatively little to discourage continuous borrowing at the window, so member
banks could adjust their reserve positions directly with the Federal Reserve by running discount window borrowing up or down. In addition, banks had a highly effective means of reserve adjustment in the call loan market. Since the middle of the nineteenth century, banks had made a significant fraction of their loans to stock brokers, secured by stock or bond collateral on a continuing contract, overnight basis.15 A bank could obtain reserves on demand by calling its broker loans, and it could readily lend excess reserves by issuing more broker loans. The call loan market was thus the functional equivalent of the federal funds market for reserve adjustment purposes.

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The more restrictive discount policy and the discouragement of call lending increased the cost to banks of membership in the Federal Reserve System by raising the cost of reserve management. Since membership always has been voluntary, the Federal Reserve had to be concerned that the increased cost might prompt members to leave the System. To retain members, the Federal Reserve had an incentive to provide a substitute means of reserve adjustment. Making federal funds nonreservable did so by allowing member banks to obtain overnight interbank deposits free of reserve requirements.

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참고자료: The Topology of the Federal Funds Market (Nov. 2008)


The federal funds market is the market for immediately available reserve balances at the Federal Reserve. Depository institutions that maintain accounts at the Federal Reserve can borrow(buy) or lend(sell) reserve balances. Federal funds, or fed funds, are unsecured loans and the rate at which these transactions occur is called the fed funds rate. (...)

Depository institutions hold reserve balances at the Federal Reserve Banks to meet reserve requirements(an average over a two week period) and to prevent any overnight overdrafts that may arise from their payment activities with other depository institutions. The day to day flows of business to and from a bank are unlikely to leave it with the desired level of reserves. The federal funds market is one option to adjust the level of reserves. A bank with a shortfall may buy federal funds. Like bank deposits, borrowed federal funds are bank liabilities. From a regulatory poiunt of view, borroed fed funds are treated differently and are not subject to reserve requirements.

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