The Federal Funds rate has exhibited regular drops at month ends since beginning of 2015.

enter image description here

(Source: FRED https://fred.stlouisfed.org/series/EFFR)

Some studies (e.g., https://www.mdpi.com/1911-8074/14/5/204/pdf) have pointed to window dressing by banks to boost their LCR in month-end reporting as reasons for this curious phenomenon.

Specifically, banks who wishes to improve their LCR on the last day of the month would decrease borrowing in the Federal Funds market. This reduces demand for loans, and pushes the interest rates down.

However, it appears that the pattern largely disappeared from mid 2018 to mid 2021, and is only recently making a comeback (see fig below zoomed in on 2021).

enter image description here

My question is: why did the the pattern disappear during this period? Were there any regulatory changes? Or was it due to some other market structural changes?

Bonus question:

I have also found this SE question (Fed Funds Rate - why has it just started decreasing on the final day of each month (vs quarter)) from 2015, with an answer suggesting further that only foreign banks report monthly, while US banks report daily.

Are there any official regulatory documents backing this claim (regarding the frequency of reporting)?

Any and all comments/insights are appreciated!


I had some thoughts on why dips appear shortly after I posted this question (but didn't write them down here!). It seems that dips are related to the tightness in monetary conditions, as evidenced by the EFFR-IORB spread:

EFFR-IORB spread

Specifically, in easy monetary environments ((foreign) banks borrow from the FF market at EFFR below IORB, deposit into FED account earning IORB) the month-end dips show up. On the other hand, when monetary conditions are tight (banks lend into the FF market, EFFR above IORB), the month-end dips no longer exists.

I don't know if the relationship is causal, or if so, the underlying mechanisms. But this seems to be an interesting correlation I have to think about..

  • $\begingroup$ As the person who asked the 2015 question, I haven't been able to piece together a complete answer yet. I'm working through two sources of this microstructure noise: relevant reporting regimes (e.g. Fed FR Y-14, FFIEC 101, 031, 041, etc.) and Fed levers (asset purchases, interest on required and excess reserves, overnight repo returns, etc.). I'll add an answer as soon as I piece it all together. $\endgroup$
    – MikeRand
    Oct 9, 2021 at 15:53
  • $\begingroup$ If I am not mistaken, this was caused by arbitrage available to foreign banks in US money markets due to not having to pay deposit insurance. $\endgroup$ Jan 31, 2022 at 18:52
  • 1
    $\begingroup$ Here: federalreserve.gov/econres/notes/feds-notes/… $\endgroup$ Jan 31, 2022 at 18:53
  • $\begingroup$ @DaneelOlivaw Thanks for the link! I have not seen the Note before. My hypothesis is that once EFFR (or funding rate for foreign banks) is close enough to IORB, FDIC-exempt foreign banks would reduce borrowing because the IOR arbitrage opportunity disappears. Consequently the need for window dressing disappears at month ends. And once the the EFFR-IROB spread becomes negative (as it did in recent months), they would once again enter into the arbitrage, and the month-end dips return. $\endgroup$
    – GZ-
    Jan 31, 2022 at 19:21


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