Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System
IMF Working Papers, August 1, 2011
Source details
- Canonical URL
- Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System
Other formats
Bibliographic details
- Authors: Zoltan Pozsar
- Published: August 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781462307265.001
Summary
- Through the profiling of institutional cash pools, this paper explains the rise of the "shadow" banking system from a demand-side perspective.
- Explaining the rise of shadow banking from this angle paints a very different picture than the supply-side angle that views it as a story of banks' funding preferences and arbitrage.
- Institutional cash pools prefer to avoid too much unsecured exposure to banks even through insured deposits.
- Short-term government guaranteed securities are the next best choice, but their supply is insufficient.
- The shadow banking system arose to fill this vacuum.
- One way to manage the size of the shadow banking system is by adopting the supply management of Treasury bills as a macroprudential tool.
Key findings and analysis
- Institutional cash pools exhibit a demand-side preference structure that reduces reliance on unsecured bank exposure, including insured deposits.
- Insufficient supply of short-term government guaranteed securities creates a gap between demand for safe, short-term assets and available Treasury bill supply.
- The shadow banking system functionally fills the gap created by this shortfall of government-guaranteed short-term instruments.
- Viewing shadow banking through the institutional cash pool lens produces different policy implications compared with supply-side explanations centered on bank behavior and arbitrage.
Policy recommendations and implications
- Consider adopting supply management of Treasury bills as a macroprudential tool to influence the size and role of the shadow banking system.
- Policy approaches focused solely on banks' funding preferences may miss demand-side drivers originating from institutional cash pool behavior.
- Managing the supply of short-term government guaranteed securities can be an instrument to address the demand-supply imbalance that gives rise to nonbank intermediaries.