LCR Premium in the Federal Funds Market

Finance and Economics Discussion Series Federal Reserve Board, Washington, D.C. ISSN 1936-2854 (Print) ISSN 2767-3898 (Online) LCR Premium in the Federal Funds Market Alyssa Anderson and Manjola Tase 2023-071 Please cite this paper as: Anderson,Alyssa,andManjolaTase(2023). “LCRPremiumintheFederalFundsMarket,” FinanceandEconomicsDiscussionSeries2023-071. Washington: BoardofGovernorsofthe Federal Reserve System, https://doi.org/10.17016/FEDS.2023.071. NOTE: Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the Finance and Economics Discussion Series (other than acknowledgement) should be cleared with the author(s) to protect the tentative character of these papers.

LCR Premium in the Federal Funds Market∗ Alyssa Anderson† Manjola Tase‡ November 3, 2023 Abstract We document the existence of a regulatory premium in the federal funds market related to the implementation of the Liquidity Coverage Ratio (LCR). We use difference-in-differences analysis and confidential bank level data on borrowing in the fed funds and Eurodollar markets to compare the interest rates paid by banks subject to daily reporting of their liquidity profile (daily reporters) relative to other banks. We find that, after the implementation of LCR, daily reporters paid a higher rate compared to other banks when borrowing in the fed funds market given the LCR-favorability of many of the lenders in this market. In addition, on the days that banks borrowed in both the fed funds and Eurodollar markets, daily reporters paid a higher rate than other banks for their borrowing in the fed funds market but not for their borrowing in the Eurodollar market. Keywords: federal funds, Eurodollars, Liquidity Coverage Ratio, market segmentation JEL Classification: E49, E52, G21, G28 ∗We thank seminar participants at the Federal Reserve Board for their helpful comments. Elizabeth Getis and Sophia Lochner provided excellent research assistance. The analysis and conclusions set forth are our own and do notnecessarilyreflecttheviewsoftheBoardofGovernorsorthestaffoftheFederalReserveSystem. Allremaining errors are our own. †Federal Reserve Board, E-mail: alyssa.g.anderson@frb.gov ‡Federal Reserve Board, E-mail: manjola.tase@frb.gov 1

1 Introduction Since the Global Financial Crisis (GFC), the landscape of banking regulation has changed significantly with the implementation of a number of new requirements including the Liquidity Coverage Ratio(LCR).TheLCRrequiresbankstoholdhigh-qualityliquidassetstocovershort-termfunding outflows. Because the LCR directly affects the attractiveness of wholesale funding, it has fundamentalimplicationsforthedeterminationofshort-terminterestratesandthereforemonetarypolicy implementation. In this paper, we document the existence of a regulatory premium in the federal (fed) funds market related to the full implementation of the LCR in January 2017. Given differences in lender composition across overnight funding markets, the LCR treatment of borrowing in these markets varies. In particular, lending in the fed funds market is done primarily by Federal Home Loan Banks (FHLBs), which have a relatively favorable LCR treatment. As a result, we show that banks subject to daily reporting of their liquidity profile are willing to pay higher rates for this funding. We start by documenting two stylized facts about the fed funds and Eurodollar markets for the period April 2014 to February 2020. These markets are close substitutes as they are both overnightunsecuredmarketsinwhichbankstypicallyborrow. Akeydifferencehoweveristhelender composition. FHLBs provide the vast majority of lending in the fed funds market and borrowing from them has a lower run-off factor for the LCR than does borrowing from the counterparties that typically lend in the Eurodollar market. Therefore, a bank trying to improve its LCR should be willing to pay a higher rate for fed funds than for Eurodollars. Indeed, the following stylized facts support this hypothesis. First, after the full implementation of the LCR in 2017, daily LCR reporters on average paid a relatively higher rate when borrowing in the fed funds market. Second, in the Eurodollar market, daily LCR reporters on average paid a lower rate than other borrowers after implementation. 1

Then, we use confidential bank-level data on selected balance sheet items and transaction-level data on borrowing in the fed funds and Eurodollar markets to analyze banks’ pricing behavior and establish the existence of an LCR premium in the fed funds market. Our empirical strategy consistsoftwosteps. First,usingdatafortheperiodApril2014toFebruary2020,weusedifferencein-differences analysis to establish that, after 2017, daily LCR reporters paid a relatively higher rate compared to other banks when borrowing in the fed funds market. Second, using data from January 2017 to February 2020, and restricting the sample to days when banks participated in both markets, we show that daily LCR reporters paid a higher rate than other banks for their borrowing in the fed funds market but not for their borrowing in the Eurodollar market. These results establish that the premium paid by the daily LCR reporters in the fed funds market is an LCR premium. Our findings on an LCR premium in the fed funds market are in the spirit of the theoretical model of Bech and Keister (2017), which shows that when banks face the possibility of an LCR shortfall, a regulatory premium arises for rates on longer term funding since this funding has a smaller run-off factor than overnight funding. In our setup, borrowing from FHLBs in the fed funds market has a smaller run-off factor than borrowing from lenders in the Eurodollar market and therefore is akin to longer term funding in Bech and Keister (2017)’s model. On the empirical side, ourpaperisclosesttoBonnerandEijffinger(2012)whostudytheeffectofliquidityregulation on the Dutch interbank market. Using the liquidity rule introduced by De Nederlandsche Bank in 2003 as a proxy for the LCR, they find that banks that were just above (below) their short-term liquidity requirement pay (charge) a higher interest rate for interbank loans. Ourpapercontributestothegrowingliteratureontheeffectsofliquidityregulationssuchasthe LCR.AsdiscussedinthesurveypaperofAllenandGale(2017),thereisstillmuchtobeunderstood about the purposes and consequences of liquidity regulation. However, several recent papers have looked at the effects of the LCR on monetary policy implementation and financial markets and 2

institutions. Rezende et al. (2021) estimate the effects of LCR on the tenders that banks submit in Term Deposit Facility operations, a Federal Reserve tool created to manage the quantity of central bank reserves. Their results suggest that liquidity regulation affects bank demand in monetary policy operations. Macchiavelli and Pettit (2021) study the effect of the LCR on broker-dealers and find that, while the LCR brings some financial stability benefits, it also leads to less liquidity transformation by broker-dealers. Our work also contributes to the broader literature on the fed funds market, which has seen significant changes over time. Hamilton (1996), Ashcraft and Duffie (2007), Afonso and Lagos (2015a), and Afonso and Lagos (2015b) focus on the federal funds market as a market for reserves. Afonso et al. (2011) and Ashcraft et al. (2011) look at the federal funds market during the GFC and examine the importance of liquidity hoarding and counterparty risk during this period. Bech and Klee (2011) show that, following the GFC and the substantial increase in reserve balances in the system, the fed funds market, as a market for reallocating reserves among banks, almost disappeared. Banegas and Tase (2020) focus on the fed funds market in the context of two regulatory changes—the widening of the FDIC assessment base and the introduction of the Basel III leverage ratio. Afonso et al. (2019) develop a model that is capable of reproducing the main features of the fed funds market, as observed before and after the GFC, in a single, unified framework. They find that the evolution of interest rates and trading volume in the fed funds market as the supply of aggregate reserves shrinks is highly sensitive to the dynamics of the distribution of reserves across banks. Kim et al. (2020) find that even at a sufficiently low level of reserves, the costs associated with new banking regulations might hinder the fed funds market from returning to its pre-GFC function. The paper is organized as follows. In Section 2, we provide some background information on fed funds and Eurodollar markets and the LCR. Section 3 discusses the stylized facts that provide the motivation for this paper. Section 4 describes the data. Section 5 presents our empirical 3

strategy and discusses the results documenting the LCR premium in the fed funds market. Section 6 concludes. 2 Background 2.1 Fed Funds and Eurodollar Markets The fed funds and Eurodollar markets are overnight unsecured markets in which banks borrow. Since the GFC, the lenders in fed funds are almost all FHLBs, while the lenders in Eurodollars are primarily non-depository financial institutions, such as money market funds (MMFs) as well as some corporations. The nature of trading in these markets changed dramatically following the GFC for two main reasons. First,theFederalReservebegantopayinterestonreservesinOctober2008,whichallowed banks, but not other money market participants, to earn interest on the reserve balances they held at the Federal Reserve.1 Second, the amount of reserves in the system increased dramatically as a result of the Feds large-scale asset purchases in response to the financial crisis and subsequent recession. Before the GFC, the fed funds market was primarily an interbank market, in which banks that were short on reserves, either for their reserve requirements or for intraday payment flows, would borrow from banks that had excess reserves on a given day. However, following the GFC, banks had abundant liquidity and therefore there was minimal need for this type of borrowing. Instead, during much of the post-GFC period, the fed funds and Eurodollar markets have been characterizedbyinterestonexcessreserves(IOER)arbitrage. Inthisarbitragetrade,banksborrow in these overnight unsecured markets at a rate below IOER and then hold those funds as reserves at the Federal Reserve to earn IOER. This arbitrage emerged following the introduction of IOER since the lenders in these markets are primarily non-bank institutions that do not have access to 1For details, see https://www.federalreserve.gov/newsevents/pressreleases/monetary20081006a.htm. 4

IOER (e.g., FHLBs in fed funds and MMFs in Eurodollars). Furthermore, IOER arbitrage is more profitable for foreign banks (FBOs) than it is for domestic banks.2 Consequently, borrowing in these markets is dominated by FBOs.3 2.2 Liquidity Coverage Ratio The Basel III LCR rule requires a bank subject to the rule to maintain an amount of high-quality liquid assets (HQLA) (the numerator of the ratio) that is no less than its total net cash outflow amount over the forward-looking 30 calendar-day period (the denominator of the ratio) as in equation 1. Stock of HQLA LCR = ≥ 100% (1) Total net cash flow over the next 30 days ThefinalU.S.LCRrulewasadoptedbytheFederalReserveBoard,theOfficeoftheComptroller of the Currency, and the Federal Deposit Insurance Corporation on October 10, 2014 and became effective January 1, 2015.4 As shown in Figures 1 and 2, the U.S. LCR rule was implemented gradually and by January 1, 2017, LCR reporting banks were required to maintain an LCR of at least 100 percent. LCR banks are required to disclose publicly, on a quarterly basis, quantitative information about their LCR calculation (as daily averages over the quarter) and a discussion of the factors that have a significant effect on their LCR. In addition, for supervisory purposes, the Federal Reserve Board monitors a banks liquidity profile on a more frequent basis for certain large banking organizations.5 As we will discuss in the data section, these banking organizations, which include certain domestic banks and U.S. branches 2IOER arbitrage expands the size of a banks balance sheet. The cost of expanding the balance sheet is smaller for FBOs compared to domestic banks since FBOs are not subject to the FDIC assessment fee, which, after April 2011, is calculated based on the total size of the balance sheet. 3See Anderson et al. (2021) for further discussion of IOER arbitrage and its implications for global banks. 4See 79 Federal Register 61440 (October 10, 2014). 5On November 17, 2015, the Board adopted the revised FR 2052a Complex Institution Liquidity Monitoring Report to collect quantitative information on selected assets, liabilities, funding activities, and contingent liabilities from certain large banking organizations. 5

of foreign banks, report variables related to their liquidity profile either at a daily or monthly frequency, based on their size and international exposure. For the purpose of our analysis, we refer to these banks as daily and monthly LCR reporters, respectively. As we discuss below, such daily liquidity reporting requirements could drive demand for certain types of short-term funding that could improve a banks liquidity profile. 3 Motivation ItiscommonforbankstoparticipateinboththefedfundsandEurodollarmarketsonadailybasis. For example, as shown in Tables 1 and 2, about 30 percent of the total number of observations corresponds to banks participating in both markets. The overlap in participation is slightly higher for daily reporters. However, borrowing in fed funds, where the vast majority of lending is done by FHLBs, is more LCR-favorable than borrowing in Eurodollars, where most lending is done by MMFs. Specifically, borrowingeitherinfedfundsorEurodollars, whenusedtofinancereserves, increasesabank’sstock of HQLA (the numerator of the LCR) by that same amount. It also increases the denominator by the amount of the overnight borrowing adjusted by a corresponding run-off factor depending on the counterparty type. Borrowing from FHLBs has a smaller run-off factor than borrowing from non-depository financial institutions (such as MMFs).6 This makes borrowing in fed funds more favorable from an LCR perspective than borrowing in Eurodollars. For banks reporting liquidity metrics at a daily frequency for supervisory purposes, borrowing in fed funds is an easily accessible market to cover possible LCR shortfalls. On aggregate, we do not see the emergence of an LCR premium in the fed funds market. That is, we do not see a widening of the spread between the effective federal funds rate (EFFR) and the volume-weighted median Eurodollar rate. Consistent with Duffie and Krishnamurthy (2016), this 6See https://www.bis.org/publ/bcbs238.pdf for further details on the calculation of the LCR. 6

is likely due to the LCR not being binding for most institutions since system liquidity was quite abundant at this time. However, there may be important changes occurring in the cross-section for those institutions that are closer to a binding LCR. In particular, we explore whether there are any interest rate differentials for the daily versus non-daily reporters when borrowing in the fed funds and Eurodollar markets. Figure 3 plots the average rates paid by daily LCR reporters and other borrowers in the fed funds market. As daily reporters are large banks, we would expect these banks to pay, on average, a lower rate to obtain funding given their market power. Indeed, before the full implementation of LCR in 2017, daily LCR reporters, on average, paid less than other borrowers. However, after 2017, daily reporters experienced a rate increase compared to other banks; that is, rate paid by daily reporters became closer to the rate paid by other borrowers in the fed funds market. On the contrary, as shown in Figure 4, daily reporters paid a lower rate for borrowing the Eurodollar market than other borrowers did after implementation. These observations support the hypothesis of an LCR premium in the fed funds market: daily LCR reporters should pay a higher rate to obtain funding in fed funds and improve their LCR. Theoretical support for the existence of an LCR premium can be found in Bech and Keister (2017). They study the impact of the Basel III LCR on interbank interest rates in a model of competitive interbank markets in the tradition of Poole (1968). There are two types of contracts traded in the interbank market: overnight and term loans. The only difference between these two is how they enter a banks LCR calculation: overnight loans have a higher run-off factor than term loans do. They find that when banks face the possibility of an LCR shortfall, the overnight interest rate tends to decrease, while a regulatory premium arises in longer-term rates. For the purpose of our analysis, overnight and term loans in the Bech and Keister (2017) model would be akin to Eurodollar and fed funds trades, respectively, in terms of how they enter the LCR calculation. 7

4 Data We combine confidential microdata collected by the Federal Reserve from the FR 2420 (“Report of Selected Money Market Rates) and the FR 2644 (“Weekly Report of Selected Assets and Liabilities of Domestically Chartered Commercial Banks and U.S. Branches and Agencies of Foreign Banks”). We construct the LCR reporting frequency variable (daily, monthly, or other/non applicable) by matching the banks reporting in FR 2420 with reporters of FR 2052a (“Complex Institution Liquidity Monitoring Report). The FR 2420 report collects transaction-level data on banks’ borrowing activity in selected money market instruments on a daily basis. The collection includes, in separate parts, federal funds (as defined by Regulation D); Eurodollars (dollar-denominated liabilities outside the U.S.); certificates of deposit/time deposits; and selected deposits.7 Reported information includes the trade date, settlement date, maturity date, amount, interest rate, and counterparty type for each transaction.8 The FR 2420 collection supports the publication of the effective federal funds rate (EFFR),theFederalReservespolicyrateforwhichtheFederalOpenMarketCommitteeestablishes atargetrange,andtheovernightbankfundingrate(OBFR),areferencerateofovernightunsecured bank funding costs. The FR 2644 report collects weekly data on the outstanding amount of selected bank balance sheet items, including loans, securities, and borrowings, among others, from a sample of domestically chartered commercial banks and U.S. branches and agencies of foreign banks. Data collected 7While selected deposits are a significant portion of overnight unsecured borrowing, they are not included in our analysissincedataonthesetransactionswerenotcollecteduntilOctober2018. Weomitcertificatesofdepositsgiven our focus on overnight interest rates. 8The FR 2420 reporting panel is comprised of U.S. commercial banks, thrifts, and branches and agencies of foreign banks, IBFs and significant banking organizations representing entities actively participating in the federal fundsand/orothermoneymarkets. Commercialbanksandthriftsrequiredtoreportforagivenyeararethosewith $18billionormoreintotalassetsontheSeptember30CallReportoftheprioryear,orthosewithbetween$5billion and $18 billion in assets that meet certain unsecured borrowing activity thresholds. U.S. branches and agencies of foreign banks required to report the FR 2420 daily are those that had third-party assets of $2.5 billion or more on the September 30 FFIEC 002 of the prior year. IBFs of the above-referenced institutions are required to report daily for Eurodollars only. For further information on the FR 2420, see https://www.newyorkfed.org/banking/ reportingforms/FR_2420.html. 8

on this report parallel the quarterly Consolidated Reports of Condition and Income (Call Reports) but are less granular. Aggregate data are published in the weekly Assets and Liabilities of Commercial Banks in the United States (H.8) statistical release.9 We create a dataset of LCR reporting frequency by matching the FR 2420 reporters (or their bank holding company) with the list of banks reporting in FR 2052a. The only information we extract from this match is whether the bank is a daily or monthly LCR reporter. This set of banks includes both domestic banks and U.S. branches of foreign banks (FBOs). Specifically, FBO Large Institution Supervision Coordinating Committee (LISCC) firms and U.S. firms with $700 billion or more in total consolidated assets or $10 trillion or more in assets under custody must submit a report on each business day. We defined these banks as daily LCR reporters. FBOs that are not identified as LISCC firms and are greater than $50 billion in combined U.S. operations and U.S. firms with $50 billion or more in total consolidated assets, but less than $700 billion in total consolidatedassetsandlessthan$10trillioninassetsundercustodymustsubmitareportmonthly. We define these as monthly LCR reporters. Thefinaldatasetusedinourmainanalysiscontainsbank-levelinformationonfedfundsborrowing (volume and rate), Eurodollar borrowing (volume and rate), selected balance sheet items (cash and reserves, deposits, total assets, and total liabilities), LCR reporting frequency (daily, monthly, or other/not applicable), and whether the bank is domestic or foreign. The data is weekly, as of Wednesday each week for the period April 2014 to February 2020. 5 Empirical strategy and results Our panel analysis has two parts. In the first part, we focus our analysis on the fed funds market for the period April 2014 to February 2020. We use difference-in-differences analysis to test the hypothesis that, when borrowing in the fed funds market, daily LCR reporters paid a relatively 9For the reporting form see https://www.federalreserve.gov/apps/reportforms/default.aspx; for the H.8 statistical release see https://www.federalreserve.gov/releases/h8/about.htm. 9

higher rate following the full implementation of the LCR reporting requirement (January 1, 2017) compared to other borrowers. In the second part, we juxtapose the fed fund market and the Eurodollar market. We compare pricing behaviour in the fed funds and Eurodollar markets during the period January 2017 to February 2020 restricting the sample to the days when banks participated in both markets. We test the hypothesis that daily reporters paid a premium in the fed funds market, but not in the Eurodollar market. In the next section, we discuss factors affecting bank’s borrowing in the fed funds and the Eurodollar markets. We then continue with the empirical testing of the two hypotheses described above. 5.1 Factors affecting bank’s borrowing in the fed funds and Eurodollar markets Our empirical model accounts for the following channels that are expected to affect the rate a bank pays for borrowing in the fed funds and Eurodollar markets. LCR implementation and frequency of reporting. As discussed previously, the two periods of interest are before and after the full implementation of the LCR at the beginning of 2017. In terms of reporting frequency, “daily LCR reporters” is the group of interest. We also account for monthly reporters on month-end dates. “Other/non applicable reporters” is our control group. Funding substitution. Banksusevarioussourcesoffunding, withdepositsmakingupthelargest share. A bank could borrow in fed funds or Eurodollars to cover a temporary deposit outflow. We use a bank’s deposit outflow relative to other banks’ outflows to capture idiosyncratic shocks to that banks funding. We expect that banks experiencing a relatively large shock would be more likely to pay a higher rate to obtain funding in the fed funds or Eurodollar markets. Banks liquidity buffer. We measure a bank’s liquidity buffer as the ratio of cash and reserve balances, which are the most liquid assets, to total assets. The marginal benefit of increasing the 10

liquidity buffer decreases with the size of that buffer. As a result, we expect banks with a larger liquidity buffer to pay a lower interest rate to borrow funds. Market power. We use a bank’s market share in each market (fed funds or Eurodollars) to capture its bargaining power in that market. It is reasonable to expect a nonlinear relationship between a bank’s market share and the rate it pays: as a bank increases its borrowing, it might have to pay more for a number of reasons, such as needing to reach out to more lenders or having a more inelastic demand. However, once a bank reaches a certain market share, it might be able to use its bargaining power to receive a lower rate. We also control for a banks overall bargaining power as captured by the total size of its balance sheet at the bank holding company level. General market conditions. We use the spread between the volume-weighted mean fed funds or Eurodollar rate and IOER to capture general trading conditions in these markets.10 Tradingmotives. Weuseabank’sdomicile(foreignordomestic)asaproxytocapturedifferences in the propensity to trade for IOER arbitrage. Even if a bank borrows at a rate below IOER, we cannot say definitively whether it is engaging in IOER arbitrage or trading for another motive. A large enough spread between a bank’s borrowing rate and IOER is a necessary but not sufficient condition for IOER arbitrage trading. For example, a bank might borrow in fed funds to improve its LCR ratio but, if the fed funds rate is less than IOER, it also earns the IOER arbitrage spread. However, as discussed in the Section 2, IOER arbitrage is more profitable for FBOs, which suggests that FBOs would have a higher propensity to trade for IOER arbitrage. Table 3 shows summary statistics for the variables described above for banks borrowing in the fed funds market and the Eurodollar market broken down by frequency of reporting (daily and non-daily). In the period prior to 2017, daily and non-daily reporters, on average, showed similar balance 10Weusevolume-weightedmeanfedfundsrateratherthantheEFFR,whichisavolume-weightedmedian,tohave more variation in the rates. 11

sheet composition characteristics as measured by the share of deposits to total liabilities and cash and reserves to total assets. However, we see these two variables diverge in the later period. Specifically,dailyreportersincreasedtheiraverageshareofcashandreservesbalancestototalassets from about 23 percent in the earlier period to 29 percent in the later period. Furthermore, daily LCR reporters borrowing in fed funds in the earlier period show similar balance sheet composition to daily LCR reporters borrowing in Eurodollars during the later period. A possible explanation could be that daily reporters borrowing in Eurodollars in the later period and the daily reporters borrowinginfedfundsintheearlierperiodtradeformotivesotherthanimprovingtheirLCRratio. If a daily reporter has not changed its balance sheet such that it relies on fed funds for improving its LCR, a daily reporter borrowing the Eurodollars would be more similar to a daily reporter borrowing in fed funds prior to 2017. In contrast, non-daily reporters decreased their share of cash and reserves balances to total assets from about 29 percent to 17 percent. This implies a preference of daily reporters for holding reserves at a time when total reserves in the banking system were declining.11. Furthermore, across these two time periods, the average bank’s market share in fed funds increased for daily reporters (from 1.3 percent to 1.6 percent) and decreased for non-daily reporters (from 1.9 percent to 1.7 percent). Meanwhile, general trading conditions in the fed funds market, as capture by the spread between the weighted average fed funds rate and IOER, became less conducive to IOER arbitrage trades as this spread narrowed. This implies that other trading motives, including improving the LCR, became relatively more important in trading activity in the fed funds market. 11During the period from October 2017 to July 2019, the Federal Reserve decreased the size of its balance sheet and amount of reserves in the banking system. See https://www.federalreserve.gov/monetarypolicy/ policy-normalization-discussions-communications-history.htm. 12

5.2 Estimation Results First, we use a difference-in-differences approach to analyze pricing behaviour in the fed funds market before and after the full implementation of the LCR requirement in January 2017. Next we compare pricing behaviour in the fed funds and Eurodollar markets following the full implementation. Hypothesis 1: When borrowing in the fed funds market, daily LCR reporters paid a relatively higher rate after the full implementation of the LCR reporting requirement (January 2017) compared to other borrowers. We use a difference-in-differences empirical specification as in 2. We employ a cross-sectional time-series model with panel-corrected standard errors. Specifically, the errors are allowed to be heteroskedastic across panels with panel-specific first order autocorrelation in the disturbances. Data is weekly (Wednesdays) for the period April 2014 to February 2020. FFrate −IOER = α +α DailyReporter LCRstart i,t t 0 1 i t +α MonthlyReporter MonthEnd LCRstart +α DailyReporter 2 i t t 3 i +α MonthlyReporter MonthEnd +α LCRstart 4 i t 5 t (2) +β RelativeChangeDeposits +β (CashReserves/Assets) 1 i,t 2 i,t +β MarketShareFedFunds +β MarketShareFedFunds 2 3 i,t 4 i,t +β SmallBank +β (FF −IOER )+β Foreign +(cid:15) 5 i,t 7 t t 8 i i,t FFrate −IOER is the spread between the rate paid by an individual bank i to borrow in i,t t fed funds and IOER.12 DailyReporter and MonthlyReporter are dummy variables equal to 1 if i i 12SincecounterpartytypedataisavailableonlystartingfromOctober2015,FFrate includesalltrades,notjust i,t thosewithFHLBsasacounterparty. However,thisdoesnotmateriallychangetheresultsaslendingisalmostallby FHLBs. Asarobustnesscheck,weperformthisanalysisusingdatafromOctober2015. Wefindsimilarresultswhen comparingregressionresultsfortheperiodstartingfromOctober2015usingalltradesversususingonlytradeswith an FHLB as the lender as shown in Table A.1 in the Appendix. 13

a bank reports in FR 2052a at a daily or monthly frequency, respectively. MonthEnd is equal to t 1 if t is a month-end. LCRstart is equal to 1 if t is on or after January 1, 2017 when the LCR was t fully implemented. RelativeChangeDeposits is the normalized value of the change in bank i’s i,t deposits relative to the change in bank deposits across all banks at time t. This variable captures idiosyncratic shocks to bank is sources of funding. (CashReserves/Assets) is the ratio of cash i,t andbalancesduefromdepositoryinstitutions(includingbalancesheldatFederalReservebanks)to total assets. This variable captures bank is share of most liquid assets. MarketShareFedFunds i,t is the share of bank i’s borrowing in fed funds at time t to total fed funds volume at time t. SmallBank is a dummy variable equal to 1 if total assets at the bank holding company level i,t are less than a threshold of $50 billion, which is close to the median of the distribution for our sample.13 FF −IOER is the difference between the market-level volume-weighted average rate t t in fed funds and IOER at time t. Foreign equals 1 if bank i is a U.S. branch of a foreign banking i organization. Thecoefficientsofinterestareα andα : α showstheaveragechangeinthe(FFrate−IOER) 1 2 1 spread that daily LCR reporters were paying to borrow in the fed funds market relative the average change in the (FFrate−IOER) spread paid by other banks after the full implementation of LCR; α shows the corresponding change in the spread for monthly LCR reporters on month-ends. 2 Table 4 shows the regression results. We find that the (FFrate − IOER) spread for daily reporters increased on average about 4 basis points after 2017 relative to other banks. This spread also increased on average 1.6 basis points for monthly reporters on month-ends. Before 2017, daily and monthly reporters paid about 2.7 and 1.9 basis points less, respectively, than other banks.14 13The 25th, 50th, 75th, 95th, and 99th percentiles are $23 billion, $43 billion, $107 billion, $427 billion, and $1626 billion, respectively. Results are robust to using other cut offs (such as $250 billion or $500 billion) or more than one category (defining small as banks with assets less than $50 billion and medium as banks with assets greater or equal to $50 billion but less than $250 billion). Across these specifications, the estimated difference-in-differences coefficient α varies from 2.02 to 2.73 and it is significant at 1 percent across all specifications. 1 14WealsoestimatethecorrespondingempiricalspecificationshowninEquation2fortheEurodollarmarkettotest thehypothesisthatdailyreportersdidnotpayarelativelyhigherrateafter2017comparedtootherborrowersinthis market. AsshowninTableA.2intheAppendix,theresultssupportourhypothesisthatdailyreportersdidnotpaya relativelyhigherrate. Tothecontrary,thereissomeevidence,thoughonlyweaklystatisticallysignificant,thatdaily 14

The coefficients on the control variables have the expected signs. The coefficient on bank’s relative change in deposits is positive but small. Banks experiencing a larger loss in deposits pay on average higher rates. A deposit loss that is 3 standard deviations larger than the average loss is associated with a 0.1 basis point increase in the rate. The interest rate decreases with the liquidity buffer (measured by the ratio of cash and reserves to assets): an increase of 10 percentage points (∆CashReserves/Assets = 0.1) is associated with 0.3 basis points decrease in the rate. A banks market share has a nonlinear relationship with the rate paid by the bank. Specifically, if a bank’s market share stays below 12 percent of the market, then the spread paid by the bank increases as the bank increases its borrowing relative to the market. As most banks are under this cutoff (the average share is less than 2 percent and the standard deviation is about 2.5 percent), the positive relationship is applicable for most banks in the fed funds market. Beyond this cutoff, as the bank’s share in fed funds increases, the rate decreases. The other measure of bargaining power, bank size, shows that small banks (assets less than $50 billion) pay on average 3 basis points more than larger banks. Foreign banks, which are not subject to the FDIC fee, pay on average 2.5 basis points more than domestic banks. Next we compare pricing behaviour in the fed funds and Eurodollar markets for the period following the full implementation. We limit the sample to the days when banks we present in both market and we test the following hypothesis. Hypothesis 2: Since the full implementation of the LCR reporting requirement (January 2017), on the days when banks borrowed in both the fed funds and Eurodollar markets, daily LCR reporters paid a higher rate than other banks for their borrowing in the fed funds market but not for their borrowing in the Eurodollar market. We test this hypothesis by using the following empirical approach. For each market (fed funds, reporters, on average, paid a relatively lower rate following the full implementation of LCR. A likely explanation is that, for daily reporters, borrowing in Eurodollars became more costly from a regulatory/balance sheet perspective than borrowing in fed funds. As such, these banks would require a lower rate to borrow in the Eurodollar market. 15

Eurodollars), we estimate a cross-sectional time-series model with panel-corrected standard errors as in Equation 3. Specifically, the errors are allowed to be heteroskedastic across panels with panelspecificfirst orderautocorrelationin thedisturbances. Datais ata weeklyfrequency (Wednesdays) for the period January 2017 to February 2020. Spread = α +α DailyReporter +α MonthlyReporter MonthEnd i,t 0 1 i 2 i t +β RelativeChangeDeposits +β (CashReserves/Assets) +β MarketShare 1 i,t 2 i,t 3 i,t +β MarketShare 2+β SmallBank +β MarketSpread 4 i,t 5 i,t 6 t +β Foreign +(cid:15) 7 i,t i,t (3) Spread is the spread between the rate paid by bank i to borrow in fed fund/Eurodollars and i,t IOER at time t. MarketSpread is the difference between the volume-weighted average market t rate in fed funds/Eurodollars and IOER at time t. We use the same set of control variables as defined in Equation 2. The coefficient of interest is α . When comparing daily reporters with other banks on the days 1 whenbanksparticipateinbothfedfundsandEurodollarmarkets,weexpectdailyLCRreportersto payapremiumforborrowinginthefedfundsmarketbutnottheEurdollarmarketifα > 0 1,fedfunds and α ≤ 0. 1,Eurodollar Table 5 shows the regression results for the sample of banks borrowing in both the fed funds and Eurodollar markets on the same day. When daily LCR reporters borrowed in both fed funds and Eurodollars, they paid on average 2.4 basis points more than other banks for borrowing in fed funds, but they did not pay a premium when borrowing in Eurodollars. Our empirical analysis supports the hypothesis of an LCR premium in the fed funds market: daily LCR reporters pay a relatively higher rate to obtain funding in fed funds in order to improve their LCR. 16

6 Conclusion Inthispaper, wedocumenttheexistenceofaregulatorypremiuminthefedfundsmarketfollowing the full implementation of the LCR in 2017. After 2017, banks that report their liquidity profile daily paid relatively more than other banks when borrowing in the fed funds market since trades with FHLBs, the primary lender in fed funds, are treated favorably in the LCR. We do not find similar behavior in the Eurodollar market, in which borrowing is not advantageous from an LCR perspective. With daily reporting banks using the fed funds market to meet their liquidity reporting requirements, the fed funds market has likely become more responsive to the distribution of reserves in the system and the corresponding funding needs of banks even when there are ample aggregate reserves. 17

References Afonso, G. and Lagos, R. (2015a), “The Over-the-Counter Theory of the Feds Funds Market: A primer,” Journal of Money, Credit and Banking, 47, 127–154. Afonso, G. and Lagos, R. (2015b), “Trade Dynamics in the Market for Federal Funds,” Econometrica, 83, 263–313. Afonso, G., Kovner, A., and Schoar, A. (2011), “Stressed, not Frozen: The Federal Funds Market in the Financial Crisis,” The Journal of Finance, 66, 1109–1139. Afonso,G.,Armenter,R.,andLester,B.(2019),“AModeloftheFederalFundsMarket: Yesterday, Today, and Tomorrow,” Review of Economic Dynamics, 33, 177–204. Allen, F. and Gale, D. (2017), Achieving Financial Stability, chap. How Should Bank Liquidity be Regulated?, pp. 135–157. Anderson, A. G., Du, W., and Schlusche, B. (2021), “Arbitrage Capital of Global Banks,” Working Paper 28658, National Bureau of Economic Research. Ashcraft, A. and Duffie, D. (2007), “Systemic Illiquidity in the Federal Funds Market,” The American Economic Review, 97, 221–225. Ashcraft, A., McAndrews, J., and Skeie, D. (2011), “Precautionary Reserves and the Interbank Market,” Journal of Money, Credit and Banking, 43, 311–348. Banegas, A. and Tase, M. (2020), “Reserve balances, the federal funds market and arbitrage in the new regulatory framework,” Journal of Banking & Finance, 118. Bech,M.andKeister,T.(2017),“Liquidityregulationandtheimplementationofmonetarypolicy,” Journal of Monetary Economics, 92, 64–77. 18

Bech, M. and Klee, E. (2011), “The Mechanics of a Graceful Exit: Interest on Reserves and Segmentation in the Federal Funds Market,” Journal of Monetary Economics, 5, 415–431. Bonner, C. and Eijffinger, S. (2012), “The Impact of the LCR on the Interbank Money Market,” SSRN. Duffie, D. and Krishnamurthy, A. (2016), “Passthrough efficiency in the feds new monetary policy setting,” in Designing Resilient Monetary Policy Frameworks for the Future. Federal Reserve Bank of Kansas City, Jackson Hole Symposium, pp. 1815–1847. Hamilton, J. D. (1996), “The Daily Market for Federal Funds,” Journal of Political Economy, 104, 26–56. Kim, K., Martin, A., and Nosal, E. (2020), “Can the U.S. Interbank Market Be Revived?” Journal of Money, Credit and Banking, 52, 1645–1689. Macchiavelli, M. and Pettit, L. (2021), “Liquidity Regulation and Financial Intermediaries,” Journal of Financial and Quantitative Analysis, 56, 2237. Poole, W. (1968), “Commercial bank reserve management in a stochastic model: implications for monetary policy,” Journal of Finance, 23, 769791. Rezende,M.,Styczynski,M.-F.,andVojtech,C.M.(2021),“TheEffectsofLiquidityRegulationon Bank Demand in Monetary Policy Operations,” Journal of Financial Intermediation, 46, 100860. 19

Figure 1: Transition period for the liquidity coverage ratio Source: Federal Register, Vol. 79, No. 197, Friday, October 10, 2014, Rules and Regulations: Table 5. Figure 2: Transition period for the modified liquidity coverage ratio Source: Federal Register, Vol. 79, No. 197, Friday, October 10, 2014, Rules and Regulations: Table 6. 20

Figure 3: Interest rate paid for borrowing in the fed funds market )% ni( etaR sdnuF deF egarevA 5.2 2 5.1 1 5. 0 01jan2014 01jan2016 01jan2018 01jan2020 Date Daily LCR Reporters Non Daily LCR Reporters Note: This figure plots the average interest rate by daily and non-daily reporters for borrowing in the fed funds market. Daily reporters refers to bank reporting FR 2052a at a daily frequency. The tripwire denotes the start of LCR implementation on January 1, 2017. 21

Figure 4: Interest rate paid for borrowing in the Eurodollar market )% ni( etaR rallodoruE egarevA 5.2 2 5.1 1 5. 0 01jan2017 01jan2018 01jan2019 01jan2020 Date Daily LCR Reporters Non Daily LCR Reporters Note: This figure plots the average interest rate by daily and non-daily reporters for borrowing in the Eurodollar market. Daily reporters refers to bank reporting FR 2052a at a daily frequency. 22

Table 1: Borrowing frequency for all banks Eurodollars Fed funds 0 1 Total 0 0 2,691 2,691 1 5,213 3,010 8,223 Total 5,213 5,701 10,914 Notes: This table shows the overlap of trading between the fed funds and Eurodollars markets for all banks in our sample. Observations are at the bank and time level. Fed funds equals 1 if a bank trades in the fed funds market in a given week and Eurodollars equals 1 if a bank trades in the Eurodollar market in a given week. Data is weekly (Wednesdays) for the period January 2017 to February 2020. Table 2: Borrowing frequency by daily LCR reporters Eurodollars Fed funds 0 1 Total 0 0 680 680 1 148 445 593 Total 148 1,125 1,273 Notes: This table shows the overlap of trading between the fed funds and Eurodollars markets for daily LCR reporter banks. Observations are the bank and time level. Fed funds equals 1 if a bank trades in the fed funds market in a given week and Eurodollars equals 1 if a bank trades in the Eurodollar market in a given week. Data is weekly (Wednesdays) for the period January 2017 to February 2020. 23

Table 3: Summary statistics Banks borrowing in the fed funds market Daily reporters Non-daily reporters Apr.2014 - Dec.2016 Jan.2017- Feb.2020 Apr.2014 - Dec.2016 Jan.2017- Feb.2020 Variables Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Dep/Liabilities 0.668 0.226 0.562 0.293 0.626 0.300 0.708 0.262 CashReserves/Assets 0.227 0.141 0.288 0.226 0.289 0.310 0.168 0.214 Market Share 0.013 0.025 0.016 0.026 0.019 0.028 0.017 0.024 Total Assets ($bill) 881 650 560 683 100 103 89 105 FF-IOER (bps) -13.1 2.6 -3.4 5.3 -13.1 2.6 -3.4 5.3 No. of Obs. 673 593 5,979 7,630 Banks borrowing in the Eurodollar market Daily reporters Non-daily reporters Apr.2014 - Dec.2016 Jan.2017- Feb.2020 Apr.2014 - Dec.2016 Jan.2017- Feb.2020 Variables mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Mean Std. Dev. Dep/Liabilities 0.717 0.188 0.654 0.290 0.519 0.276 0.498 0.270 CashReserves/Assets 0.181 0.119 0.177 0.127 0.358 0.296 0.314 0.240 Market Share 0.079 0.110 0.029 0.036 0.030 0.046 0.023 0.035 Total Assets ($ bill) 931 615 883 703 91 102 74 94 Eurodollar-IOER (bps) -12.0 2.5 -5.0 4.2 -12.0 2.5 -5.0 4.2 No. of Obs. 849 1,125 2167 4,576 Notes: This table shows summary statistics for banks that borrow in the fed funds market and the Eurodollar market. Daily reporters are banks reporting FR 2052a at a daily frequency, while non-daily reporters are all others. Dep/Liabilities is the share of total deposits to total liabilities. CashReserves/Assets is the ratio of cash and balances due from depository institutions (including balances held at Federal Reserve Banks) to total assets. MarketShare is the share of a bank’s borrowing in fed funds relative to total fed funds volume. TotalAssets is the total assets at the bank holding company level. FF −IOER is the spread between volume-weighted mean market fed funds rate and IOER. Eurodollar−IOER is the spread between the volume-weighted mean market Eurodollar rate and IOER. Data is at a weekly frequency (Wednesdays) for the period April 2014 to February 2020. 24

Table 4: Difference-in-differences regression: Banks borrowing in the fed funds market (1) (2) Variables Fed Funds Spread Fed Funds Spread DailyReporter*LCRstart 3.983*** 4.017*** (0.508) (0.507) MonthlyReporter*MonthEnd*LCRstart 1.662*** (0.404) DailyReporter -2.769*** -2.675*** (0.362) (0.356) MonthlyReporter*MonthEnd -1.895*** (0.340) LCRstart 0.187 0.243 (0.214) (0.212) RelativeChangeDeposits 0.0321** 0.0312** (0.0145) (0.0145) CashReserves/Assets -3.019*** -3.108*** (0.428) (0.428) MarketShareFedFunds 79.23*** 80.75*** (4.530) (4.566) MarketShareFedFunds2 -473.3*** -481.0*** (39.56) (39.91) SmallBank 3.175*** 3.215*** (0.239) (0.231) FF-IOER 0.801*** 0.785*** (0.00906) (0.00961) Foreign 2.354*** 2.477*** (0.290) (0.283) Constant -4.962*** -5.268*** (0.269) (0.258) Observations 13,884 13,884 Number of Banks 103 103 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 Notes: The dependent variable is the spread between the rate paid by an individual bank to borrow in fed funds and IOER. DailyReporter and MonthlyReporter are dummy variables equal to 1 if a bank reports in FR 2052a at a daily or monthly frequency, respectively. MonthEnd is equal to 1 on month-ends. LCRstart is equal to 1 on or after January 1, 2017. RelativeChangeDeposits is the normalized value of the change in a bank’s deposits relative to the change in deposits across all banks. (CashReserves/Assets) is the ratio of cash and balances due from depository institutions (including balances held at Federal Reserve Banks) to total assets. MarketShareFF is the share of a bank’s borrowing in fed funds to total fed funds volume. SmallBank is a dummy variable equal to 1 if total assets at the bank holding company level are less than $50 billion. FF −IOER is the difference between the volume-weighted mean market rate in fed funds and IOER. Foreign equals 1 if a bank is a U.S. branch of a foreign bank organization. Data is at a weekly frequency (Wednesdays) for the period April 2014 to February 2020. 25

Table 5: Fed funds versus Eurodollars after LCR implementation (1) (2) (3) (4) Variables Fed Funds Fed Funds Eurodollar Eurodollar DailyReporter 2.397*** 2.418*** -2.102 -2.105 (0.559) (0.561) (2.720) (2.721) MonthlyReporter*MonthEnd -0.215 0.227 (0.308) (0.533) RelativeChangeDeposits 0.00392 0.00323 0.0614 0.0618 (0.0298) (0.0299) (0.0692) (0.0692) CashReserves/Assets -0.709 -0.743* -5.435*** -5.404*** (0.434) (0.436) (1.244) (1.246) MarketShare 54.73*** 54.36*** 98.49*** 98.38*** (8.139) (8.170) (12.23) (12.24) MarketShare2 -284.8*** -282.8*** -381.8*** -381.2*** (81.55) (81.78) (66.30) (66.27) SmallBank 0.339 0.388 -1.235** -1.236** (0.256) (0.256) (0.494) (0.495) MarketSpread 0.905*** 0.902*** 0.666*** 0.670*** (0.0148) (0.0159) (0.0330) (0.0341) Foreign 12.05*** 12.05*** 9.413*** 9.402*** (0.600) (0.602) (1.220) (1.219) Constant -14.29*** -14.32*** -9.500*** -9.480*** (0.626) (0.626) (1.153) (1.152) Observations 2,966 2,966 2,966 2,966 Number of Banks 34 34 34 34 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 Notes: The dependent variable is the spread between the rate paid by an individual bank to borrow in fed funds (Eurodollars) and IOER (Spread ). DailyReporter and MonthlyReporter are dummy variables i,t equal to 1 if a bank reports in FR 2052a at a daily or monthly frequency, respectively. MonthEnd is equal to 1 on month-ends. RelativeChangeDeposits is the normalized value of the change in a bank’s deposits relative to the change in deposits across all banks. (CashReserves/Assets) is the ratio of cash and balances due from depository institutions (including balances held at Federal Reserve banks) to total assets. MarketShare is the share of a bank’s borrowing in fed funds (Eurodollar) to total fed funds (Eurodollar) volume. SmallBank is a dummy variable equal 1 if total assets at the bank holding company level are below $50 billion. MarketSpread is the difference between the volume-weighted average rate in fed funds (Eurodollar) and IOER. Foreign equals 1 if bank is a U.S. branch of a foreign bank organization. Data is at a weekly frequency (Wednesdays) for the period January 2017 to February 2020. The sample is limited to banks participating in both both markets on the same day. 26

A Appendix: Robustness Analysis Table A.1: Difference-in-differences regression: Banks borrowing in the fed funds market: All lenders vs FHLB lenders (1) (2) (3) (4) (5) (6) Variables All All All All FHLBs FHLBs DailyReporter*LCRstart 3.983*** 4.017*** 1.506* 1.483* 0.727* 0.713* (0.508) (0.507) (0.790) (0.786) (0.410) (0.408) MonthlyReporter*MonthEnd*LCRstart 1.662*** 1.967*** 0.729*** (0.404) (0.486) (0.210) DailyReporter -2.769*** -2.675*** -2.329*** -2.070*** -1.036*** -1.048*** (0.362) (0.356) (0.783) (0.776) (0.107) (0.106) MonthlyReporter*MonthEnd -1.895*** -2.041*** -1.477*** (0.340) (0.403) (0.180) LCRstart 0.187 0.243 0.755*** 0.827*** 0.525*** 0.637*** (0.214) (0.212) (0.260) (0.260) (0.0878) (0.0894) RelativeChangeDeposits 0.0321** 0.0312** 0.0220 0.0216 -0.00293 -0.00922 (0.0145) (0.0145) (0.0221) (0.0221) (0.0154) (0.0151) CashAssets -3.019*** -3.108*** -4.289*** -4.512*** -0.908*** -1.042*** (0.428) (0.428) (0.638) (0.637) (0.221) (0.220) MarketShare 79.23*** 80.75*** 128.1*** 131.4*** 15.39*** 16.14*** (4.530) (4.566) (7.765) (7.788) (2.955) (2.939) MarketShare2 -473.3*** -481.0*** -904.0*** -926.4*** -73.42** -72.17** (39.56) (39.91) (81.04) (81.40) (30.96) (30.88) SmallBank 3.175*** 3.215*** 4.243*** 4.452*** 1.124*** 1.111*** (0.239) (0.231) (0.300) (0.294) (0.0872) (0.0881) FF-IOER 0.801*** 0.785*** 0.787*** 0.771*** 0.915*** 0.893*** (0.00906) (0.00961) (0.0111) (0.0118) (0.00503) (0.00553) foreign 2.354*** 2.477*** 0.575 0.834** -1.055*** -0.998*** (0.290) (0.283) (0.384) (0.379) (0.102) (0.103) Constant -4.962*** -5.268*** -5.634*** -6.103*** -0.769*** -0.995*** (0.269) (0.258) (0.370) (0.361) (0.108) (0.110) Observations 13,884 13,884 10,388 10,388 6,942 6,942 Numberofbanks 103 103 91 91 66 66 Standarderrorsinparentheses ***p<0.01,**p<0.05,*p<0.1 Notes: The dependent variable is the spread between the rate paid by an individual bank to borrow in fed funds andIOER.ThespecificationlabelsAll andFHLBscorrespondtoincludingtradeswithallcounterpartiesandonly those with FHLBs, respectively. DailyReporter and MonthlyReporter are dummy variables equal to 1 if a bank reports in FR 2052a at a daily or monthly frequency, respectively. MonthEnd is equal to 1 on month-ends. LCRstart is equal to 1 on or after January 1, 2017. RelativeChangeDeposits is the normalized value of the change in a bank’s deposits relative to the change in deposits across all banks. (CashReserves/Assets) is the ratio of cash and balances due from depository institutions (including balances held at Federal Reserve banks) to total assets. MarketShare is the share of a bank’s borrowing in fed funds to total fed funds volume. SmallBank is a dummy variable equal to 1 if total assets at the bank holding company level are less than $50 billion. FF −IOER is the difference between the volume-weighted mean market rate in fed funds and IOER. Foreign equals 1 if a bank is a U.S. branch of a foreign bank organization. The data is at a weekly frequency (Wednesdays). Specifications 1 and 2 start in April 2014; specifications 3 through 6 start in October 2015. The end date in all specifications is February 2020. 27

Table A.2: Difference-in-differences regression: Banks borrowing in the Eurodollar market (1) (2) Variables Eurodollar Eurodollar DailyReporter*LCRstart -4.135* -4.108* (2.119) (2.120) MonthlyReporter*EndOfMonth*LCRstart 1.149* (0.630) DailyReporter 1.741 1.747 (2.016) (2.014) MonthlyReporter*EndOfMonth -0.656 (0.536) LCRstart 0.174 0.111 (0.385) (0.394) RelativeChangeDepTotal 0.0567 0.0535 (0.0370) (0.0373) Cash/Assets -4.035*** -4.026*** (0.761) (0.764) MarketShareEurodollar 51.26*** 51.56*** (5.032) (5.090) MarketShareEurodollar2 -137.1*** -137.2*** (19.02) (19.11) SmallBank -0.426 -0.487 (0.371) (0.386) Eurodollar-IOER 0.667*** 0.671*** (0.0181) (0.0194) Foreign 10.48*** 10.66*** (1.017) (1.020) Constant -12.04*** -12.08*** (0.997) (0.996) Observations 8,383 8,383 Number of banks 48 48 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 Notes: The dependent variable is the spread between the rate paid by an individual bank to borrow in Eurodollar and IOER. DailyReporter and MonthlyReporter are dummy variables equal to 1 if a bank reports in FR 2052a at a daily or monthly frequency, respectively. MonthEnd is equal to 1 on month-ends. LCRstart is equal to 1 on or after January 1, 2017. RelativeChangeDeposits is the normalized value of the change in a bank’s deposits relative to the change in deposits across all banks. (CashReserves/Assets) is the ratio of cash and balances due from depository institutions (including balances held at Federal Reserve banks) to total assets. MarketShare is the share of a bank’s borrowing in Eurodollar to total Eurodollar volume. SmallBank is a dummy variable equal to 1 if total assets at the bank holding company level are less than $50 billion. Eurodollar−IOER is the difference between the volume-weighted mean market Eurodollar rate and IOER. Foreign equals 1 if a bank is a U.S. branch of a foreign bank organization. Data is at a weekly frequency (Wednesdays) for the period April 2014 to February 2020. 28