Financial institutions have increasingly relied on short-term instruments to meet their funding needs.1 In quantifying an appropriate measure of this reliance on short-term funding, two measures are relevant: a gross amount and a net amount. We estimate both the gross amount, which is all “runnable debt” in the United States, and the net amount, in which we eliminate the double counting of liabilities that arise from financial
intermediaries (namely, money market mutual funds and securities lenders). The gross amount is relevant since it is a measure of how vulnerable the financial system is to
panicked runs as a result of short-term debt issuance, while the net amount is relevant to the chapter 21 discussion of how much debt the Treasury or the Fed would have to incur to crowd out private short-term debt with public short-term debt.
Consider the following example that illustrates the difference between the gross and net amounts. Suppose, as illustrated in figure 20.1, that a MMF wishes to lend $1.00 against
$1.02 of collateral in a repo transaction, and that a hedge fund wishes to borrow $1.00 against $1.02 of collateral. If the two funds have institutional relationships with different banks (bank A and bank B), their single “net” trade could give rise to three “gross trades.”
If we are interested in crowding out, one would net the transactions, as the entire chain could be replaced by a single transaction with the Fed, so the net amount is the relevant
measure. However, if we are interested in financial fragility, and where runs could start, we should consider each runnable step of the chain and the gross amount is the relevant measure.
Figure 20.1 Intermediation chain in repo transaction
20.1.1 Gross Funding
Summarized in table 20.1 are estimates of the $7.4 to $8.2 trillion in gross runnable short-term debt (with maturities of 30 days or less) at the end of 2014, based on the inclusion of repurchase agreements backed by US treasuries. A recent Federal Reserve note places the gross amount of runnable debt at a higher figure based on an inclusion of certain uninsured liabilities that may or may not be runnable. Either way, for contagion purposes, there is still a substantial amount of runnable debt.2 As previously discussed in chapter 12, the size of the entire private uninsured short-term funding market is
approximately $10.6 trillion, or 18.6 percent of the $57 trillion total US credit market, but this higher number is not restricted to 30 day or less maturities.3
Table 20.1 Level of runnable short-term debt
Type USD billions
Runnable commercial paper $787.9
Runnable repo 1,982.9 w/o treasury repo2,743.4 w/ treasury repo Runnable deposits 2,537.0
Securities lending 720.6 Prime MMF shares 1,401.0
Total $7,429.4 w/o treasury repo$8,189.9 w/ treasury repo Our estimate of gross short-term funding includes five components: commercial paper, repurchase agreements, uninsured deposits, securities lending, and certain money market fund shares. We adjust these components to more narrowly identify debt of 30 days or less. First, we estimate the total amount of commercial paper with a maturity of thirty days or less to be $788 billion.4 Second, we estimate the size of the market for repurchase agreements with maturities thirty days or less to be $1,983 billion to $2,743 billion. While the maturity structure of all repo is not available in public filings,5 it is possible to roughly estimate this figure. Using money market fund repo holdings as proxy for the overall repo market, we estimate that 86 percent of term repo has a maturity of thirty days or less.
Since the overall repo market (excluding repo purchased from the Fed through its reverse
repo program (“RRP”), which is not runnable) is $3,190 billion, there is then roughly
$2,743 billion of runnable repo.6 However, that figure includes repo collaterized by treasuries. Exlcuding treasury-backed repos would drop the amount to $1,983 billion.7 The inclusion of repos backed by treasuries depends on whether one thinks such repos are “runnable.” Recent scholarship suggests that repo collateralized by treasuries is just as vulnerable to runs as other forms of repo, so we include both amounts.8 Net repo lending from outside the financial sector tends to take place through tri-party repo.
Copeland, Martin, and Walker (2014) provide evidence that Lehman Treasury tri-party repo experienced runs as severely as its other forms of tri-party repo. Third, runnable uninsured deposits are $2,537 billion.9 Fourth, net securities lending liabilities amounts to $721 billion.10 However, as noted by the New York Fed, most securities lending is conducted by asset managers, pension funds, or insurance companies that engage in the practice to increase yield, not to fund their operations.11 As a result a run on securities lending will affect returns for these institutions, but not necessarily lead to solvency problems. Finally, we assume that only prime money market mutual funds are at risk of runs, which amount to $1,403 billion.12 Therefore we estimate that the gross size of runnable private debt is around $7.4 to $8.2 trillion.13
20.1.2 Net Funding
We are also interested in estimating a measure of net runnable debt, since that is how much debt the Treasury or the Fed would have to incur to crowd out private short-term debt with public short-term debt. Since the gross amount double counts many liabilities, as illustrated above in the example of MMFs, the net figure should remove the double- counted liabilities. Therefore our estimate of the net amount of runnable debt does not include certain financial intermediaries in the calculation, namely money market mutual funds, and does not include certain financial intermediation transactions, namely
securities lending, which are double counted in the gross figure. Further we consider only repo transactions with funding sourced from outside the banking sector since bank-to- bank repo transactions are simply a lengthening of the intermediation chain and are therefore double-counted in the gross amount (similar to MMFs). Therefore, to obtain the net amount we only include commercial paper, uninsured deposits, and net
repurchase agreements funded outside the banking system (i.e., excluding intra-banking system repo).
As above, the total amount of commercial paper with a maturity of thirty days or less is estimated to be $788 billion and runnable uninsured deposits amount to $2,537 billion.
For repos we are interested in the amount of short-term financing that originates from the nonbanking sector, thus excluding the repo transactions that occur entirely among banks. We estimate this amount by determining the quantity of repo assets held by major cash investors, namely money market funds, mutual funds, securities lenders’ cash
collateral reinvestment, GSEs, and the domestic nonfinancial sector. We then exclude the amounts of the holdings held in Fed RRPs, since those liabilities should not be
considered “runnable.” Our total estimate amounts to $1,172 billion.14 However, some of
the repo transactions in this figure have maturities greater than thirty days. Therefore, using our prior estimate that 86 percent of term repo has a maturity of 30 days or less, we calculate the runnable repo market to be $1,008 billion, including treasury-backed repo.
Excluding treasury-backed repo reduces the amount to $729 billion.15 In total, we estimate that the net size of runnable private debt is around $4.0 to $4.3 trillion.
20.1.3 Importance of Short-Term Funding
The scale of the gross runnable short-term funding market of $8.2 trillion is comparable to the total US government debt of $13 trillion.16 However, it is nearly six times larger than the $1.4 trillion of US government debt issued with a maturity of less than one
year.17 It is also nearly twice the size of the Federal Reserve’s $4.5 trillion balance sheet.18 Increased reliance on private short-term funding makes the financial system more
susceptible to contagious panics, as illustrated by the run on money market mutual funds during the financial crisis. As noted in the 2014 International Monetary Fund’s Global Financial Stability report, the growth in private short-term debt issuance (i.e., growth in the supply of short-term debt) may be driven by increased demand for money-like
securities from large institutional cash pools.19 These institutional cash pools include the cash balances of large nonfinancial corporations, large institutional investors and asset managers, and large sovereign wealth funds.20 These cash pools have increased from $2 trillion in 1997 to approximately $6 trillion at the end of 2013.21 These pools have large cash-management needs, and therefore represent a large and consistent source of
demand for safe and liquid money-like claims.22
Consistent with this increased demand, recent research has found that the yield on safe short-term debt instruments is lower than would otherwise be expected by the added safety and liquidity of these instruments. They define and quantify this yield differential as the “money premium.”23 Indeed the money premium presumably reflects the fact that the recent increase in demand from these pools has not yet been met by a commensurate increase in supply of safe short-term debt instruments. The presence of a money
premium therefore incentivizes private-sector firms to fund themselves by issuing short- term money-like claims to capture this premium. Issuers do not fully, if at all, internalize the increased risk of contagion created by this increased issuance.24
Although total short term funding has not decreased, as set forth in table 12.1 in the chapter 12 section on insuring short-term liabilities, US banks have generally become less reliant on wholesale short-term funding since the peak of the financial crisis. The
composition of bank short-term funding in the United States has shifted increasingly from wholesale short-term funding to retail deposits. Wholesale short-term funding as a percentage of retail deposits has declined from roughly 140 percent in 2008 to 62 percent at the end of 2012.25 While retail funding may not be as likely to disappear in a contagion situation, as reflected in the liquidity coverage ratio, it is still vulnerable to runs. And concern continues about the level of wholesale funding, however reduced. Further the shift of bank short-term funding to the nonbank sector, over which there is less control,
arguably makes the situation not better but worse.