Please, could you confirm if the following is accurate? Thanks you so much.
Vanguard has a dollar denominated account at Barclays U.K.
Barclays U.K. has a dollar denominated deposit at Barclays U.S.
Deutsche Bank U.K. has a dollar denominated deposit at Deutsche Bank U.S.
Vanguard orders Barclays U.K. to pay 10.000 $ to Deutsche Bank U.K. (payment for the C.P.)
Barclays U.K. instructs Barclays U.S. to debit his account by 10.000 $ and transfer that sum to Deutsche Bank U.S.
Reserves (10.000 $) are wired to Deutsche Bank U.S. and then Deutsche Bank U.S. credits the dollar denominated account belonging to Deutsche Bank U.K. by 10.000 $.
10.000 $ (deposit) have been extinguished in Barclays U.K. account belonging to Vanguard (replaced by C.P.) and in Barclays U.K. account at Barclays U.S.
10.000 $ (deposit) have been added in Deutsche Bank U.K. account at Deutsche Bank U.S.
10.000 $ (reserves) have been extinguished in Barclays U.S. master account at the FED and 10.000 $ (reserves) credited in Deutsche Bank U.S. master account at the FED.
Nice one Conks! Definitely cleared up a couple misconceptions I had about the ED system, but most importantly it frames the transition to the new SOFR based secured funding model. Can’t wait for the next piece. Thanks for your good work!
I am still a little lost as to the offshore onshore distinction. IMHO, I feel like the entire Eurodollar system can summarized by "correspondent banking". To my knowledge, and correct me if I am wrong, only banks within the Federal Reserve system can hold dollars (e.g., a small rural bank in Italy can't hold dollar deposits nor make dollar loans). That means that if you want to provide dollars outside of America you need a bank with dollar access (e.g., an Italian bank uses a British bank to provide it a dollar loan). But isn't the catch here the dollars never actually leave the U.S.? British bank (which is the US branch) simply debits Italian's bank account in USD vs. EURO/GBP. Even more so, presumably if the foreigners (Italians) are borrowing in dollars it's to purchase a U.S. asset, good/service, investment. These deposits get spent and just stay in the U.S. What am I missing here?
your description is correct. correspondent banking is accurate. you (or your banking partner) needs access to an onshore bank to settle payments.
reserves never leave the country, but bank deposits do. banks simply credit and debit accounts cross-border and settle payments when needed onshore via reserves so eurodollars are bank deposits with parallel (onshore/offshore) settlement.
How to bank deposits leave the country? I get the physical currency, but the deposits I am lost on. I feel like at best they are transferred from a US bank, to a domestic (US) office of a foreign bank. I guess that can be considered "offshore", but not really (e.g., if it goes from JPM Chase to Barlcays US branch).
On a you tube channel- i heard the argument that in a credit crunch by the banks liquidity goes to financial markets over the economy fueling stocks. Ironically, the Fed achieves the opposite?
Great piece, thank you for this one. Be good to explore the way in which the Eurodollar system imploded during the GFC and what the consequences are of the FRB swap lines are.
The Interconnectedness of US Dollar Funding Graphic in other posts states the estimated size of the Euro Dollar system as $60 Trillion. Yet in this article you state “Eurodollar volumes today still average around $100 billion daily, but that pales in comparison to before the GFC.” Could you explain the difference please? Thanks
The Fed only records specific transactions in its methodology for measuring Eurodollar volumes. Plus, the $60 trillion is an estimate of all unsecured dollar deposits/loans in the offshore banking system. There are a lot of different estimates and I went with the median. Nobody truly knows how big or small it is.
Still trying to learn Greek, but do we need an Asian-dollar system, or does the Euro dollar work world wide. Would be great if you can explain also the dedollarization that we hear about.
if the eurodollar system shrank so much is there a dollar shortage all over the world? is that driving a liquidity contraction? trade contraction? Do you see a BRIC currency as feasible when they have currency controls? or is that as we impose sanctions and controls and regs like knowing source of funds etc in banking- we are
1. No. Funding, in the form of Treasuries and agency MBS and repo, replaced unsecured bank loans.
2. Liquidity has been offset by the injection of reserves and Treasuries. As I've said in earlier pieces, the RRP shows we are in an “excess liquidity era”.
3. Not feasible as a global reserve.
4. That is a possible outcome, as monetary leaders are trying to expand collection of data in various markets. But it's unlikely.
First of all hope you recover soon. Thank you for the nice article. I have a question more on the implementation side. So in the past it was easy to get exposure to the offshore-onshore dollar rate spread (LIBOR - OIS). However, right now how could one gain outright exposure to the spread? Also, given the strong tie of OBFR and EFFR right now, do you think in a new stress situation (like GFC/COVID) we would still see an offshore dollar rates decoupling? Or FX swaps lines would prevent the spread even from widening?
I would suggest with the elimination of Regulations such as Reg D(reserve requirements) and Reg Q(interest rate ceilings) along with new regulations such as applying FDIC insurance premiums to assets worldwide the distinction between Fed Funds and Eurodollars is becoming less apparent (In fact for sure I really don't know what purpose IBF's continue to serve in the US). Probably the biggest factor in differentiating the Eurodollar market from the Fed Funds market today is most foreign banks don't have US branches and thus have no direct access to Fed Funds and Fedwire although the largest non US banks do have US branches and in countries like Canada, France, and Australia with highly concentrated banking system effectively that means all of the major financial players(RBC, BNP Paribas, CIBC, NAB, WestPac, SocGen, etc.) have direct access to the Fed. Additionally, I suspect for reasons of geography, law, and time zones there are many non US entities that prefer to keep US dollar deposits in either their home country or in a regional financial center like London or Singapore than in the US itself. I suspect though in the Western Hemisphere there has been a sharp decline in dollar deposits held in the Carribean as there is simply less and less advantage to keeping them their vs having them onshore in the US itself.
One future issue to come: The Fed has long dormant statutory authority to open Master Accounts for non US banks but cannot pay interest on settlement balances(much like with the FHLB's). As the large US and non-US Global SIFI's continue to withdraw from providing US Dollar correspondent nostro accounts(an increasingly low return but high compliance and capital cost business) will the Fed feel compelled to open Master Accounts for non-US banks and given that they cannot pay interest on them will this create some new hybrid between the Eurodollar and Fed Funds markets?
I’m not sure I understand the payment process.
Please, could you confirm if the following is accurate? Thanks you so much.
Vanguard has a dollar denominated account at Barclays U.K.
Barclays U.K. has a dollar denominated deposit at Barclays U.S.
Deutsche Bank U.K. has a dollar denominated deposit at Deutsche Bank U.S.
Vanguard orders Barclays U.K. to pay 10.000 $ to Deutsche Bank U.K. (payment for the C.P.)
Barclays U.K. instructs Barclays U.S. to debit his account by 10.000 $ and transfer that sum to Deutsche Bank U.S.
Reserves (10.000 $) are wired to Deutsche Bank U.S. and then Deutsche Bank U.S. credits the dollar denominated account belonging to Deutsche Bank U.K. by 10.000 $.
10.000 $ (deposit) have been extinguished in Barclays U.K. account belonging to Vanguard (replaced by C.P.) and in Barclays U.K. account at Barclays U.S.
10.000 $ (deposit) have been added in Deutsche Bank U.K. account at Deutsche Bank U.S.
10.000 $ (reserves) have been extinguished in Barclays U.S. master account at the FED and 10.000 $ (reserves) credited in Deutsche Bank U.S. master account at the FED.
Nice one Conks! Definitely cleared up a couple misconceptions I had about the ED system, but most importantly it frames the transition to the new SOFR based secured funding model. Can’t wait for the next piece. Thanks for your good work!
Thank you!
Excellent. Thanks!
Thank you!
I am still a little lost as to the offshore onshore distinction. IMHO, I feel like the entire Eurodollar system can summarized by "correspondent banking". To my knowledge, and correct me if I am wrong, only banks within the Federal Reserve system can hold dollars (e.g., a small rural bank in Italy can't hold dollar deposits nor make dollar loans). That means that if you want to provide dollars outside of America you need a bank with dollar access (e.g., an Italian bank uses a British bank to provide it a dollar loan). But isn't the catch here the dollars never actually leave the U.S.? British bank (which is the US branch) simply debits Italian's bank account in USD vs. EURO/GBP. Even more so, presumably if the foreigners (Italians) are borrowing in dollars it's to purchase a U.S. asset, good/service, investment. These deposits get spent and just stay in the U.S. What am I missing here?
Also, how is the Vanguard MMF an offshore entity?
your description is correct. correspondent banking is accurate. you (or your banking partner) needs access to an onshore bank to settle payments.
reserves never leave the country, but bank deposits do. banks simply credit and debit accounts cross-border and settle payments when needed onshore via reserves so eurodollars are bank deposits with parallel (onshore/offshore) settlement.
Vanguard offers MMFs to customers outside the U.S, hence "offshore" https://fund-docs.vanguard.com/money-market-prospectus.pdf https://www.vanguard.co.uk/professional/product/fund/money-market/9974/sterling-short-term-money-market-fund-investor-gbp-income-shares
How to bank deposits leave the country? I get the physical currency, but the deposits I am lost on. I feel like at best they are transferred from a US bank, to a domestic (US) office of a foreign bank. I guess that can be considered "offshore", but not really (e.g., if it goes from JPM Chase to Barlcays US branch).
https://files.stlouisfed.org/files/htdocs/publications/review/71/07/Principles_Jul1971.pdf
page 23 shows what i mean.
Got it. So, like most other things with banking, it's simply a bookkeeping exercise.
Could you view the Rest of World claims on deposits then as Eurodollars?
https://fred.stlouisfed.org/series/ROWCHDQ027S
Seems it would fit the definition provided by Friedman.
a market exists for each currency. EuroEuros, EuroYens, etc.
Great piece, always a pleasure to read your work!
Thanks!
On a you tube channel- i heard the argument that in a credit crunch by the banks liquidity goes to financial markets over the economy fueling stocks. Ironically, the Fed achieves the opposite?
Great piece, thank you for this one. Be good to explore the way in which the Eurodollar system imploded during the GFC and what the consequences are of the FRB swap lines are.
Thank you!
The Interconnectedness of US Dollar Funding Graphic in other posts states the estimated size of the Euro Dollar system as $60 Trillion. Yet in this article you state “Eurodollar volumes today still average around $100 billion daily, but that pales in comparison to before the GFC.” Could you explain the difference please? Thanks
The Fed only records specific transactions in its methodology for measuring Eurodollar volumes. Plus, the $60 trillion is an estimate of all unsecured dollar deposits/loans in the offshore banking system. There are a lot of different estimates and I went with the median. Nobody truly knows how big or small it is.
Still trying to learn Greek, but do we need an Asian-dollar system, or does the Euro dollar work world wide. Would be great if you can explain also the dedollarization that we hear about.
Works everywhere where dollars are accepted and unfrozen. 😄
if the eurodollar system shrank so much is there a dollar shortage all over the world? is that driving a liquidity contraction? trade contraction? Do you see a BRIC currency as feasible when they have currency controls? or is that as we impose sanctions and controls and regs like knowing source of funds etc in banking- we are
making ourselves look like a third world
or second rate country in terms of currency?
1. No. Funding, in the form of Treasuries and agency MBS and repo, replaced unsecured bank loans.
2. Liquidity has been offset by the injection of reserves and Treasuries. As I've said in earlier pieces, the RRP shows we are in an “excess liquidity era”.
3. Not feasible as a global reserve.
4. That is a possible outcome, as monetary leaders are trying to expand collection of data in various markets. But it's unlikely.
Why wouldn’t Barclays earn the IORB itself instead of lending the money offshore to Deutsche Bank? What’s the catch here?
Barclays are obligated to settle the payment of their customer, the prime fund. To do so, they need to transfer reserves to Deutsche Bank.
Hi Conks,
First of all hope you recover soon. Thank you for the nice article. I have a question more on the implementation side. So in the past it was easy to get exposure to the offshore-onshore dollar rate spread (LIBOR - OIS). However, right now how could one gain outright exposure to the spread? Also, given the strong tie of OBFR and EFFR right now, do you think in a new stress situation (like GFC/COVID) we would still see an offshore dollar rates decoupling? Or FX swaps lines would prevent the spread even from widening?
Best and thanks a lot in advance
Excellent article....as always this is a big eye opener....👏🏾👏🏾
I would suggest with the elimination of Regulations such as Reg D(reserve requirements) and Reg Q(interest rate ceilings) along with new regulations such as applying FDIC insurance premiums to assets worldwide the distinction between Fed Funds and Eurodollars is becoming less apparent (In fact for sure I really don't know what purpose IBF's continue to serve in the US). Probably the biggest factor in differentiating the Eurodollar market from the Fed Funds market today is most foreign banks don't have US branches and thus have no direct access to Fed Funds and Fedwire although the largest non US banks do have US branches and in countries like Canada, France, and Australia with highly concentrated banking system effectively that means all of the major financial players(RBC, BNP Paribas, CIBC, NAB, WestPac, SocGen, etc.) have direct access to the Fed. Additionally, I suspect for reasons of geography, law, and time zones there are many non US entities that prefer to keep US dollar deposits in either their home country or in a regional financial center like London or Singapore than in the US itself. I suspect though in the Western Hemisphere there has been a sharp decline in dollar deposits held in the Carribean as there is simply less and less advantage to keeping them their vs having them onshore in the US itself.
One future issue to come: The Fed has long dormant statutory authority to open Master Accounts for non US banks but cannot pay interest on settlement balances(much like with the FHLB's). As the large US and non-US Global SIFI's continue to withdraw from providing US Dollar correspondent nostro accounts(an increasingly low return but high compliance and capital cost business) will the Fed feel compelled to open Master Accounts for non-US banks and given that they cannot pay interest on them will this create some new hybrid between the Eurodollar and Fed Funds markets?
Are not nostro accounts via US correspondent banks of the offshore banks an integral part of the transfer process? Thanks