This paper aims to answer the question why the bulk of institutional cash pools are not invested directly in deposits in the traditional banking system but in deposit alternatives and primarily in the so-called “shadow” banking system. It analyzes the portfolio allocation rationale of institutional cash pools with the aim to better understand the systemic risks inherent in their allocations presently.
To the best of the author’s knowledge, this paper is the first to study the phenomenon of institutional cash pools and to ask why wholesale funding markets have grown, what the growing presence of institutional cash pools means for financial stability, and whether, in the context of the rise of institutional cash pools, the effectiveness of an official safety net for banks and deposits only has been eroding over time.
The paper builds on other analyses that link the recent financial crisis to demand for safe assets (see Acharya and Schnabl (2009), Caballero (2010), and Bernanke (2011)). According to these views, the financial crisis was driven by an insatiable demand from the rest of the world for safe, high-quality (that is, AAA) debt instruments, which the U.S. financial system produced through the securitization of lower-quality ones.
Contents
I. Introduction
II. What Are Institutional Cash Pools?
III. Profiling Institutional Cash Pools
IV. Cash Equivalents and Monetary Aggregates
V. The Triffin Dilemma of the U.S. Banking System
VI. Policy Alternatives for Dealing With Institutional Cash Pools
VII. Conclusions
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Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System
