The money markets are the main direct source of cheap (short-term) liquidity for banks; the relevant interest rates are LIBOR, fed funds, and repo. My current understanding is that retail deposits are ultimately the main source of funds in these markets—some banks (think Bank of America) specialize in retail and net-lend into the overnight money markets, while others net-borrow.
That money goes into Treasuries by default—i.e. whenever banks don’t have anything higher-margin to put it into. That is a profitable activity, to my understanding, at least in the long term. It’s borrowing short-term (overnight) and lending long-term (Treasury term), thereby getting paid to assume interest rate risk, which is exactly the main business of a bank.
In case people want to know more about this stuff, most of my understanding comes from Perry Mehrling’s coursera course (which I recommend), as well as the first third of Stigum’s Money Markets.
The money markets are the main direct source of cheap (short-term) liquidity for banks; the relevant interest rates are LIBOR, fed funds, and repo. My current understanding is that retail deposits are ultimately the main source of funds in these markets—some banks (think Bank of America) specialize in retail and net-lend into the overnight money markets, while others net-borrow.
That money goes into Treasuries by default—i.e. whenever banks don’t have anything higher-margin to put it into. That is a profitable activity, to my understanding, at least in the long term. It’s borrowing short-term (overnight) and lending long-term (Treasury term), thereby getting paid to assume interest rate risk, which is exactly the main business of a bank.
In case people want to know more about this stuff, most of my understanding comes from Perry Mehrling’s coursera course (which I recommend), as well as the first third of Stigum’s Money Markets.
Thanks! I’ve been hoping to come across something like this, to learn about the details of the modern banking system.