![]() Banks' preferences regarding the compositions of their liquid pools-and in particular their demand for excess reserve balances-interact with various short-term market interest rates and thus the Federal Reserve's setting of its administered rates. Understanding banks' liquidity management is central to both the implementation and the transmission of monetary policy. In particular, we address the following questions: Which particular liquid assets have banks chosen to hold and in what shares? Have those liquid shares changed over time? Do banks' preferences for these liquid shares vary? If so, what factors may be driving banks' preferences in this regard? banks have managed the composition of their HQLA to meet the LCR and other liquidity considerations over the past several years. In particular, beginning in 2015, large banks in the United States have needed to comply with the liquidity coverage ratio (LCR) by holding sufficient "high-quality liquid assets" (HQLA), a requirement that has induced significant changes to banks' balance sheet management. However, liquidity management has become an even more important consideration in banks' operations in the wake of the Global Financial Crisis of 2007-09 with the introduction of new regulations aimed at ensuring banks' ability to meet their cash and collateral obligations during times of financial stress. ![]() Liquidity management-ensuring access to sufficient quantities of assets that can be converted easily and quickly into cash with little or no loss of value-has always been a key component of banks' balance sheet management. They also thank seminar participants at the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, and the MBAA International 2018 conference. The authors thank Roop Ambardekar for his initial help with the data, Akber Khan for his excellent research assistance, and Ashish Kumbhat for his input on an earlier version of this article. Weinbach is an economist and senior associate director at the Board of Governors of the Federal Reserve System. Vojtech is a principal economist, and Gretchen C. Jane Ihrig is an economist and senior advisor, Edward Kim was a research assistant, Cindy M. Finally, we highlight how banks' preferences for the share of HQLA met with reserves affect the Fed's monetary policy implementation framework. We discuss how various regulations and business model choices can drive HQLA compositions in general, and connect many of the specific compositions we see to banks' own public statements regarding their liquidity strategies. We find that banks have adopted a wide range of HQLA compositions and show that this empirical finding is consistent with a risk-return framework that hinges on banks' aversion to liquidity and interest rate risks. banks' high-quality liquid assets (HQLA) and examine how banks have managed these assets since the crisis. Given the lack of public data on how banks have been meeting this requirement, we construct estimates of U.S. Since the Global Financial Crisis of 2007-09, these practices have been shaped importantly by the liquidity coverage ratio requirement. Banks' liquidity management practices are fundamental to understanding the implementation and transmission of monetary policy.
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