Tight policy, T-bills and Basel III affect normalisation, say researchers


The Basel III leverage ratio and banks’ balance sheet costs “incentivise them to push deposits toward money market funds (MMFs)”, an important factor in the Federal Reserve’s balance sheet normalisation, say authors with the New York Fed.

The increased amounts flowing to MMFs are subsequently deposited at the Fed’s overnight reverse repo facility (ON RRP). This helps explain why deposits have remained buoyant, even as the Fed has withdrawn liquidity through quantitative tightening.


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