A new Fed staff paper assesses monetary-policy transmission in a world of CBDCs, stablecoins, nonbanks, and tough new bank rules. We think this a significant advance in Fed research because the paper’s models (see below) reflect the substitutability of bank for nonbank assets and liabilities across the broader market made still more frictionless by the Fed’s ONRRP. We focus here on policy decisions other than those specific to monetary-policy transmission, focusing first on how the models test the impact of rules akin to Basel III, also illuminating the end-game standard impact and that of other pending rewrites. As banks have found in practice, tougher liquidity requirements are found to lead banks away from lending to larger holdings of Treasury obligations and reserves. This is well known, but the model also reinforces concerns about shadow banking by finding that, when banks move out, nonbanks move in with a small net deduction in total credit availability. A similar effect is observed when modelling higher capital requirements. The paper observes that all the new rules may well make banks safer, but the resulting larger nonbank role offsets this benefit. New rules are also found to affect the ability of the Fed to administer rates through interest on reserves, making the Fed more dependent on the ONRRP to transmit monetary policy – a challenge given ONRRP drawdowns as rates rise and the hopes of Gov. Waller and others at the Fed to phase it out. In a particularly novel finding, the paper’s models also show that higher leverage-capital requirements spark transformation of bank deposits into other products such as stablecoins, also increasing the role of nonbank financial intermediation…..
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