## Financial Plumbing and Monetary Policy

_IMF Working Papers, June 20, 2014_

## Source details

**Canonical URL:** [Financial Plumbing and Monetary Policy](https://www.imf.org/en/publications/wp/issues/2016/12/31/financial-plumbing-and-monetary-policy-41667)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/31/financial-plumbing-and-monetary-policy-41667/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/31/financial-plumbing-and-monetary-policy-41667/index.json)
- [Bundle manifest](/en/publications/wp/issues/2016/12/31/financial-plumbing-and-monetary-policy-41667/bundle-manifest.json)

## Bibliographic details
- Authors: Manmohan Singh
- Published: June 20, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498367134.001

---

### Summary findings
- Focus: how changes in financial plumbing of the markets may impact the monetary policy options as central banks contemplate lift off from zero lower bound (ZLB).
- Under proposed regulations, banks will face leverage ratio constraints.
- As a result of quantitative easing (QE), banks want balance sheet “space” for financial intermediation/non-depository activities.
- Regulatory changes are boosting demand for high quality liquid assets.
- The paper discusses the role of repo markets, the importance of collateral velocity, and the need to avoid wedges between repo and monetary policy rates when leaving ZLB.

### Key themes and mechanisms
- Leverage ratio constraints:
  - Banks constrained by leverage ratios will have less balance sheet capacity for intermediation and non-depository activities.
- Quantitative easing (QE) impacts:
  - QE increases demand for balance sheet “space” among banks.
- Demand for high quality liquid assets (HQLA):
  - Regulatory changes increase demand for HQLA, affecting market liquidity and collateral availability.
- Repo markets and collateral dynamics:
  - Role of repo markets is central to transmission of monetary policy in the presence of constrained bank balance sheets.
  - Collateral velocity is highlighted as a critical variable for market functioning.
  - Avoiding wedges between repo rates and monetary policy rates is necessary when exiting the ZLB to ensure smooth policy transmission.

### Implications for monetary policy
- Policy options at lift off from ZLB are affected by:
  - The interaction between leverage constraints, QE-induced balance sheet preferences, and elevated demand for HQLA.
- Operational considerations:
  - Central banks should monitor repo markets and collateral velocity closely.
  - Policy design should aim to prevent persistent wedges between repo rates and central bank policy rates.

---

## Content in this bundle

- **Wp14111**
  - [Wp14111 (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14111.pdf.md){rel="alternate" type="text/markdown"}
  - [Wp14111 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14111.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/financial-plumbing-and-monetary-policy-41667_