how the financial system works
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-
How the Financial System Works
1
- A Map of Money Flows in the Global Financial Ecosystem -
by Zoltan Pozsar
An Appendix to the paper Shadow Banking: The Money View (Pozsar, 2014)
Senior Adviser
Office of Financial Research, U.S. Treasury
-
2. The Hierarchy of Access.
2
3. The Hierarchy of Uses..
4. The Dealer Eco-System.
1. The Hierarchy of Money.
5. The Macro Perspective.
6. Policy Implications...
-
Four core institutions:
Central bank,
Source: Pozsar (2014)3
Central Bank
(Federal Reserve)
-
Source: Pozsar (2014)4
Four core institutions:
Central bank, banks (small and
big),
Central Bank
(Federal Reserve)
Banks
(retail)
Banks
(wholesale)
-
Source: Pozsar (2014)5
Four core institutions:
Central bank, banks (small and
big), dealers,
Central Bank
(Federal Reserve)Dealer Banks
Banks
(retail)Dealer Banks
Banks
(wholesale)
-
Source: Pozsar (2014)6
Four core institutions:
Central bank, banks (small and
big), dealers and money funds.
Central Bank
(Federal Reserve)Dealer Banks
Money Funds
Banks
(retail)Dealer Banks
Money FundsBanks
(wholesale)
-
Four core money claims:
Currency,
Source: Pozsar (2014)7
Central Bank
(Federal Reserve)Dealer Banks
Currency
Money Funds
Banks
(retail)Dealer Banks
Money Funds
Liabilities
Banks
(wholesale)
-
Source: Pozsar (2014)8
Four core money claims:
Currency, deposits,
Liabilities
Banks
(wholesale)
Deposits
(o/n)
Banks
(retail)Dealer Banks
Deposits
Money Funds
(o/n)
Central Bank
(Federal Reserve)Dealer Banks
Currency
Money Funds
-
Source: Pozsar (2014)9
Four core money claims:
Currency, deposits, repos,
(o/n)
Liabilities
Banks
(wholesale)
Deposits
(o/n)
Banks
(retail)Dealer Banks
Deposits
Money Funds
Repos
(o/n)
Central Bank
(Federal Reserve)Dealer Banks
Currency Repos
(o/n)
Money Funds
-
Source: Pozsar (2014)10
Four core money claims:
Currency, deposits, repos
and constant NAV shares.
(o/n)
Liabilities
CNAVs
(o/n)
Banks
(wholesale)
Deposits
(o/n)
CNAVs
Banks
(retail)Dealer Banks
Deposits
Money Funds
(o/n)
Repos
(o/n)
Central Bank
(Federal Reserve)Dealer Banks
Currency Repos
(o/n)
Money Funds
-
Source: Pozsar (2014)11
Two categories of assets:
Public assets:
T-Bills Treasury bills
T-Notes Treasury notes
Private assets:
P-Bills - CD, CP, ECP, etc.
P-Notes - bonds, RMBS, ABS
Liabilities
Deposits CNAVs
(o/n) (o/n)
Repos
(o/n) (o/n)
Banks
(wholesale)Money Funds
(o/n)
Private Assets
Banks
(retail)Dealer Banks
Deposits
(o/n)
Money Funds
CNAVs
Assets
Public Assets
Central Bank
(Federal Reserve)Dealer Banks
Currency Repos
-
Source: Pozsar (2014)12
Two categories of assets:
Public assets:
T-Bills Treasury bills
T-Notes Treasury notes
Private assets:
P-Bills - CD, CP, ECP, etc.
P-Notes - bonds, RMBS, ABS
Liabilities
CNAVs
(o/n)
Deposits
(o/n)
(o/n)
Private Assets
Banks
(retail)Dealer Banks
Deposits
Money Funds
(o/n)
CNAVs
Dealer Banks
T-Notes Currency Repos
(o/n)
Assets
Public Assets
Central Bank
(Federal Reserve)
Banks
(wholesale)
Money Funds
(o/n)
Repos
-
Source: Pozsar (2014)13
Two categories of assets:
Public assets:
T-Bills Treasury bills
T-Notes Treasury notes
T-Repos Treasury repos
Private assets:
P-Bills - CD, CP, ECP, etc.
P-Notes - bonds, RMBS, ABS
Liabilities
Deposits CNAVs
(o/n) (o/n)
Repos
(o/n) (o/n)
Banks
(wholesale)Money Funds
(o/n)
Private Assets
Banks
(retail)Dealer Banks
Deposits
(o/n)
T-Notes
Money Funds
CNAVs
Assets
Public Assets
Central Bank
(Federal Reserve)
Dealer Banks
(government desk)
T-Notes Currency T-Bills T-Repos
-
Source: Pozsar (2014)14
Two categories of assets:
Public assets:
T-Bills Treasury bills
T-Notes Treasury notes
T-Repos Treasury repos
T-CNAVs Treasury CNAVs
Private assets:
P-Bills - CD, CP, ECP, etc.
P-Notes - bonds, RMBS, ABS
Liabilities
Deposits CNAVs
(o/n) (o/n)
Repos
(o/n) (o/n)
Banks
(wholesale)Money Funds
(o/n)
Private Assets
Banks
(retail)Dealer Banks
Deposits
(o/n)
T-Notes
Money Funds
(government-only)
T-Bills T-CNAVs
Assets
Public Assets
Central Bank
(Federal Reserve)
Dealer Banks
(government desk)
T-Notes Currency T-Bills T-Repos
-
Source: Pozsar (2014)15
Two categories of assets:
Public assets:
T-Bills Treasury bills
T-Notes Treasury notes
T-Repos Treasury repos
T-CNAVs Treasury CNAVs
Private assets:
P-Bills - CD, CP, ECP, etc.
P-Notes - bonds, RMBS, ABS
T-Notes
Assets
Public Assets
Central Bank
(Federal Reserve)
Dealer Banks
(government desk)
T-Notes Currency T-Bills T-Repos
(o/n)
Money Funds
(government-only)
T-Bills T-CNAVs
Private Assets
Banks
(retail)Dealer Banks
P-Loans Deposits
Money Funds
(o/n) (o/n)
Banks
(wholesale)
Deposits
(o/n)
(o/n)
Repos
Liabilities
CNAVs
(o/n)
-
Source: Pozsar (2014)16
Two categories of assets:
Public assets:
T-Bills Treasury bills
T-Notes Treasury notes
T-Repos Treasury repos
T-CNAVs Treasury CNAVs
Private assets:
P-Bills - CD, CP, ECP, etc.
P-Notes - bonds, RMBS, ABS
P-Notes Deposits CNAVs
Liabilities
(o/n) (o/n)
P-Loans
(o/n) (o/n)
Banks
(wholesale)Money Funds
T-Notes
Money Funds
(government-only)
Private Assets
Banks
(retail)Dealer Banks
P-Loans Deposits
(o/n)
Repos
T-Bills T-CNAVs
Assets
Public Assets
Central Bank
(Federal Reserve)
Dealer Banks
(government desk)
T-Notes Currency T-Bills T-Repos
(o/n)
-
Source: Pozsar (2014)17
Two categories of assets:
Public assets:
T-Bills Treasury bills
T-Notes Treasury notes
T-Repos Treasury repos
T-CNAVs Treasury CNAVs
Private assets:
P-Bills - CD, CP, ECP, etc.
P-Notes - bonds, RMBS, ABS
P-Repos private repos
P-Notes Deposits CNAVs
Liabilities
(o/n) (o/n)
P-Loans
(o/n)
(o/n)
Banks
(wholesale)Money Funds
T-Notes
Money Funds
(government-only)
Private Assets
Banks
(retail)
Dealer Banks
(credit desk)
P-Loans Deposits P-Bills
P-Notes
(o/n)
P-Repos
T-Bills T-CNAVs
Assets
Public Assets
Central Bank
(Federal Reserve)
Dealer Banks
(government desk)
T-Notes Currency T-Bills T-Repos
(o/n)
-
Source: Pozsar (2014)18
Two categories of assets:
Public assets:
T-Bills Treasury bills
T-Notes Treasury notes
T-Repos Treasury repos
T-CNAVs Treasury CNAVs
Private assets:
P-Bills - CD, CP, ECP, etc.
P-Notes - bonds, RMBS, ABS
P-Repos private repos
P-CNAVs private CNAVs
P-Notes Deposits P-Bills P-CNAVs
Liabilities
(o/n) (o/n)
P-Loans
(o/n)
(o/n)
Banks
(wholesale)
Money Funds
(prime)
T-Notes
Money Funds
(government-only)
Private Assets
Banks
(retail)
Dealer Banks
(credit desk)
P-Loans Deposits P-Bills
P-Notes
(o/n)
P-Repos
T-Bills T-CNAVs
Assets
Public Assets
Central Bank
(Federal Reserve)
Dealer Banks
(government desk)
T-Notes Currency T-Bills T-Repos
(o/n)
-
Source: Pozsar (2014)19
Deposits special function:
Banks form the backbone of
the payments system and fa-
cilitate the net payments
(via deposits) of all enti-
ties that are lower in the
system-hierarchy, including
dealers and money funds. T-Bills T-CNAVs
Assets
Public Assets
Central Bank
(Federal Reserve)
Dealer Banks
(government desk)
T-Notes Currency T-Bills T-Repos
(o/n)
T-Notes
Money Funds
(government-only)
Private Assets
Banks
(retail)
Dealer Banks
(credit desk)
P-Loans Deposits P-Bills
P-Notes
(o/n)
P-Repos
(o/n)
(o/n)
Banks
(wholesale)
Money Funds
(prime)
P-Notes Deposits P-Bills P-CNAVs
Liabilities
(o/n) (o/n)
P-Loans
-
Source: Pozsar (2014)20
Storing payment surpluses:
What happens with net pay-
ment surpluses at the end of
the day? Through what ins-
truments are money balances
stored within the system?
For every institution, money
is something different.
This is the intra-system
hierarchy of money
P-Notes Deposits P-Bills P-CNAVs
Liabilities
(o/n) (o/n)
P-Loans
(o/n)
(o/n)
Banks
(wholesale)
Money Funds
(prime)
T-Notes
Money Funds
(government-only)
Private Assets
Banks
(retail)
Dealer Banks
(credit desk)
P-Loans Deposits P-Bills
P-Notes
(o/n)
P-Repos
T-Bills T-CNAVs
Assets
Public Assets
Central Bank
(Federal Reserve)
Dealer Banks
(government desk)
T-Notes Currency T-Bills T-Repos
(o/n)
-
Source: Pozsar (2014)21
Intra-system money hierarchy:
Reserves at the Fed
are money for banks.(o/n)
P-Loans
Assets
Public Assets
Central Bank
(Federal Reserve)
Reserves
P-Loans
Dealer Banks
(government desk)
T-Notes Currency T-Bills T-Repos
(o/n)
T-Notes
Money Funds
(prime)
Reserves
(o/n)
T-Bills T-CNAVs
Money Funds
(government-only)
Private Assets
Banks
(retail)
Dealer Banks
(credit desk)
Reserves Deposits P-Bills P-Repos
(o/n) (o/n) (o/n)
P-Notes
Liabilities
(o/n) (o/n) (o/n)
Banks
(wholesale)
Deposits P-Bills P-CNAVs
-
Source: Pozsar (2014)22
Intra-system money hierarchy:
o/n T-Repos with wholesale
banks are money for dealers.(o/n)
Assets
Public Assets
Central Bank
(Federal Reserve)
Reserves
Banks
(wholesale)
P-Loans
Dealer Banks
(government desk)
T-Notes Currency T-Repos T-Repos
(o/n) (o/n)
T-Notes
(o/n)
Money Funds
(government-only)
T-Bills T-CNAVs
Private Assets
Banks
(retail)
Dealer Banks
(credit desk)
Reserves Deposits P-Bills P-Repos
(o/n) (o/n) (o/n)
P-Loans
P-Notes
Money Funds
(prime)
Liabilities
Reserves T-Repos P-Bills P-CNAVs
(o/n) (o/n) (o/n)
Deposits
(o/n)
-
Source: Pozsar (2014)23
Intra-system money hierarchy:
o/n T-Repos w/ dealers are
money for government MFs.
P-Loans
P-Loans
(o/n)
Assets
Public Assets
Central Bank
(Federal Reserve)
Reserves
Private Assets
Banks
(retail)
(o/n) (o/n)
Dealer Banks
(government desk)
T-Notes Currency T-Repos T-Repos
(o/n) (o/n)
T-Notes
Money Funds
(government-only)
Reserves Deposits P-Bills P-Repos
T-Repos T-CNAVs
(o/n) (o/n)
(o/n)
Dealer Banks
(credit desk)
(o/n)
P-Notes
Banks
(wholesale)
Money Funds
(prime)
Liabilities
T-Bills
Deposits
(o/n)
Reserves T-Repos P-Bills P-CNAVs
(o/n) (o/n)
-
Source: Pozsar (2014)24
Intra-system money hierarchy:
o/n P-Repos with dealers
are money for prime MFs.
Assets
Public Assets
Central Bank
(Federal Reserve)
Dealer Banks
(government desk)
T-Notes Currency T-Repos T-Repos
Reserves (o/n) (o/n)
(o/n)
T-Notes
(o/n) (o/n)
Money Funds
(government-only)
T-Repos T-CNAVs
T-Bills
Private Assets
Banks
(retail)
Dealer Banks
(credit desk)
Reserves Deposits P-Repos P-Repos
(o/n) (o/n) (o/n)
P-Loans P-Notes
Banks
(wholesale)
Money Funds
(prime)
Reserves T-Repos P-Repos P-CNAVs
Liabilities
(o/n)
P-Loans Deposits P-Bills
(o/n)
(o/n) (o/n) (o/n) (o/n)
-
Source: Pozsar (2014)25
Liabilities
?
P-Loans Deposits P-Bills
(o/n)
(o/n) (o/n) (o/n) (o/n)
Banks
(wholesale)
Money Funds
(prime)
Reserves T-Repos P-Repos P-CNAVs
P-Loans P-Notes
P-Repos
(o/n) (o/n) (o/n) (o/n)
T-Bills
Private Assets
Banks
(retail)
Dealer Banks
(credit desk)
Reserves Deposits P-Repos
(o/n) (o/n)
Money Funds
(government-only)
T-Repos T-CNAVs
(o/n) (o/n)
(o/n)
T-Notes
Assets
Public Assets
Central Bank
(Federal Reserve)
Dealer Banks
(government desk)
T-Notes Currency T-Repos T-Repos
Reserves
-
Source: Pozsar (2014)26
The sovereign as a bank:
Without the sovereign the
money matrix is incomplete.
We do not typically think
of her as a bank, but the
sovereign is also capable
of absorbing money demand.
Assets
Public Assets
Central Bank
(Federal Reserve)
Dealer Banks
(government desk)
T-Notes Currency T-Repos T-Repos
Reserves (o/n) (o/n)
(o/n)
T-Notes
(o/n) (o/n) (o/n) (o/n)
Sovereign
(U.S. Treasury)
Money Funds
(government-only)
Reserves T-Bills T-Repos T-CNAVs
Private Assets
Banks
(retail)
Dealer Banks
(credit desk)
Reserves Deposits P-Repos
(o/n) (o/n) (o/n) (o/n)
P-Loans
T-Bills
P-Repos
P-Notes
Banks
(wholesale)
Money Funds
(prime)
Reserves T-Repos P-Repos P-CNAVs
(o/n) (o/n) (o/n) (o/n)
Liabilities
P-Loans Deposits P-Bills
(o/n)
-
Source: Pozsar (2014)27
What are money-like claims?
Par at maturity versus
par on demand claims.
Par at maturity in the
near term (o/n < 1 yr).
Breakable and negotiable
claims that do not trade
at par in real time (puts
prior to maturity subject
to penalty, market risks).
Liabilities
P-Loans Deposits P-Bills
(term) (term)
(o/n) (o/n) (o/n) (o/n)
Banks
(wholesale)
Money Funds
(prime)
Reserves T-Repos P-Repos P-CNAVs
P-Repos
P-Notes P-Repos
(term) (term)
P-Loans Deposits
T-Bills T-Bills
(term) (term)
Private Assets
Banks
(retail)
Dealer Banks
(credit desk)
Reserves Deposits P-Repos
(o/n) (o/n) (o/n) (o/n)
T-Notes T-Repos
(o/n) (o/n) (o/n) (o/n)
Sovereign
(U.S. Treasury)
Money Funds
(government-only)
Reserves T-Bills T-Repos T-CNAVs
Assets
Public Assets
Central Bank
(Federal Reserve)
Dealer Banks
(government desk)
T-Notes Currency T-Repos T-Repos
Reserves (o/n) (o/n)
(o/n)
(term)
-
The alchemy of banking:
Take more [o/n liquidity],
give less [o/n liquidity]
and put the rest in term
Source: Pozsar (2014)28
(term)
T-Notes Currency T-Repos T-Repos
T-Notes T-Repos
(term)
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