16 votes
Accepted

Does banks' profitability really suffer under low interest rates

A simple correlation/beta analysis of the Banks-relative-to-market versus interest rates or bond yields will tell you that the effect is real enough, whether in Europe, the US, or Japan... Likewise, a ...
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  • 4,896
8 votes

What is a central bank's shadow rate

It looks like it's referring to Wu and Xia (2016) shadow rates. Some more media coverage is here. The core idea of a shadow rate goes back at least to Fischer Black. Black (1995) Fischer Black's ...
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  • 6,294
7 votes

What drives the difference between M1 & M2 money supply (in the US)?

This is in response to the part of your question that asks about M1 versus M2, although it seems you've more or less answered parts of your own question. M1 is the simplest monetary aggregate and ...
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  • 561
6 votes

Does banks' profitability really suffer under low interest rates

Simplified: Banks usually live of the margin between what interest people pay fro credit vs. what interest people get for leaving their money with the bank. The higher the difference between the two, ...
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  • 161
5 votes

What is a central bank's shadow rate

The shadow rate is what the interest rate would be if money did not behave like an option. The concept was created by Fischer Black and his insight was that money acts like an option. Someone with a ...
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5 votes

A libor curve VS A 3-month or 6-month libor curve

A 3 month libor curve is a set of forward rates for 3 month libor. Thus, the curve begins at where 3 month libor is today , and takes different values for each possible forward observation date. ...
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  • 13.7k
4 votes

A libor curve VS A 3-month or 6-month libor curve

There are a lot of intricacies involved, and I'll focus on high-level stuff. Let's go back to the basics. If we have the 3-month LIBOR rate and the 6-month LIBOR rate, can we calculate the 3-month ...
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  • 10.9k
4 votes

The impact of QE measures on capital

There are at least three different ways to account for the impact of QE on banks (see The Effects of QE on Bank Lending Behavior) and the one that you cite is known as the "liquidity channel"...
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  • 561
4 votes

Can banks use reserves to settle liabilities arising from cash-settled options trading?

Yes. Deposits with the Federal Reserve are assets owned by bank A. Typically they are rebalanced everyday. So: Day 1: Bank A deposits $ 1bn with FED. ...
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  • 8,007
3 votes

The impact of QE measures on capital

I would say "no". With no quibbles about about the basic premise... Call it "QE", "SMP" (securities' market purchase) or any acronym for any variation thereof, the ...
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  • 4,896
3 votes

What drives the difference between M1 & M2 money supply (in the US)?

Broadly speaking, if something is in M2 and not M1, it's because there's some friction in spending that money, while M1 allows for mostly frictionless transactions. M1 consists of currency in ...
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  • 133
3 votes

Why repo rate above federal funds rate while appears less credit risk

In general, the Fed Funds rate is below the repo rate. That is because of a few things: With the introduction of interest on excess overnight reserves (IEOR) banks can park their money at the Fed ...
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  • 2,403
3 votes
Accepted

How can quantitative easing lower interest rates

The central bank does not decide the rates for government bond, it can only influence the rates. The market decides the rates (unless the treasury wants to issue at a huge discount or premium) it ...
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3 votes
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Trading a planned drop of FX peg

The lesson learned from the CHF episode is that the central bank eventually gets nervous about the losses they are likely to incur. Theoretically any central bank can print its own currency and sell ...
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  • 13.7k
3 votes
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The yield cure control effects on mortgages and car loans

Very short answer... The central bank cuts rates, and assumes that this should then make banks more willing to lend, which finances more of those car/student/credit-card loans etc. Except when it ...
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  • 4,896
3 votes
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How does the market derive market implied rates hike via swaps?

Which swaps are used for this purpose? - meeting date OIS. You can get runs from dealers and vendors will have some data. What is the exact methodology behind it. Are there any references? - look at ...
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  • 2,076
2 votes
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Why can't/doesn't the Fed adjust the federal funds interest rate continuously?

The Fed (under the Yellen regime) has always stated that any adjustments to the Federal Funds rate are "data dependent." These data points (CPI inflation, inflation expectations, non-farm payrolls, ...
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  • 341
2 votes

Trading a planned drop of FX peg

The other thing about the CHF peg was the central bank gave no indication and if I remember rightly in the previous meeting said they'd continue with the peg. Then one day, without notice, there's no ...
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  • 1,146
2 votes
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Why wouldn't quantitative easing work if interest rates approach 0

There are different schools of thoughts on this topic, but as @dm63 pointed out, interest rate approaching zero is not a reason for QE to lose effectiveness; it is in fact a reason for conducting QE ...
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  • 10.9k
2 votes

Why wouldn't quantitative easing work if interest rates approach 0

I don't agree with the statement. It's precisely after short term interest rates approach zero that central banks turn to QE as an additional technique to boost the economy.
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  • 13.7k
2 votes
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Why is there a need for Libor in the UK

Libor is a term rate (eg 3 month libor is the rate at which banks would lend to each other for 3 months). Fed funds (or Sonia in the UK) is an overnight rate. That's the difference.
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2 votes
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Does the FED lend directly to commercial&investment banks or is there an intermediary

This video is not explaining how banks borrow from the Fed. It is explaining the role of banks as an intermediary between the Fed and the Home Loan Banks. Thus, the Home Loan Banks have cash and ...
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  • 13.7k
2 votes

Does banks' profitability really suffer under low interest rates

Yes of course. They pay billions in interest to the central bank (ECB) and that consumes most of the profit they make on lending it out. European banks in particular are struggling to turn profitable....
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  • 163
2 votes

How would you use FRAs to find out how much Central Banks would cut/hike by?

You do not directly use FRAs to predict central bank rate moves. Instead you tend to use fed fund ois rates because they are more directly reliable as a proxy for those rates. Otherwise you might ...
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  • 8,007
2 votes

Can banks use reserves to settle liabilities arising from cash-settled options trading?

There are two forms of liability with options. The margin and the actual final settlement. Every day the options are evaluated to see their value. As the options fluctuate in value one ...
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  • 2,403
2 votes

Can banks use reserves to settle liabilities arising from cash-settled options trading?

Perhaps worthy of distinction is that a bank swap dealer would be a bilateral counterparty for an OTC uncleared derivative, but most options trade through broker-dealers and are centrally cleared (OCC,...
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  • 910
1 vote

Would FFR fall if the Fed set IOER to 0?

I agree with you- if IOER were set to zero, any bank that had excess reserves would prefer to loan them in the Fed funds market at a rate above zero, if that existed. Perhaps a small positive Fed ...
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  • 13.7k
1 vote

ECB - Two Tier System

Consider a world in which 4 banks have 3000 EUR to deposit on a daily basis with the ECB, where all of that is deposited at the going rate of -1% (minimum reserve requirements and the excess deposits) ...
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  • 8,007
1 vote

Why do banks tend to decrease lending rates, when central banks cut rates?

Why do gas stations decrease prices when oil prices drop? Why do Dell/Hp/etc decrease their PC prices as component prices drop? etc etc etc
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