NY Fed, Report: Banks’ Balance-Sheet Costs and ON RRP Investment

“In this post, we explore how banks’ balance-sheet constraints impact MMFs’ investment in the ON RRP facility. We identify two channels: a deposit channel and a wholesale short-term debt channel. Through the deposit channel, constrained banks push excess deposits into affiliated MMFs, causing an increase in the size of the MMF industry and, therefore, in its ON RRP usage. Through the wholesale short-term debt channel, constrained banks also reduce their demand for wholesale short-term borrowing, causing MMFs to replace their private repo lending to banks with ON RRP investment.”