RDP 2024-08: Modelling Reserve Demand with Deposits and the Cost of Collateral 5. Data

The sample is from November 2020 to August 2024 – a period when reserves were in ample or excess supply. I chose this sample as there is potentially a structural break in reserve demand as a result of moving away from a scarce reserves system (Borio 2023). Between March and October 2020, the RBA conducted bond purchases which resulted in excess reserves rising from $3 billion to around $89 billion in March 2020 (Finlay, Titkov and Xiang 2022). Reserves then declined steadily to $37 billion by end October 2020. After the RBA announced $100 billion of bond purchases on 3 November 2020 the supply of reserves grew rapidly. The first observation is end November 2020.

5.1 Reserves

I use excess reserve balances in my estimation; balances held over and above any minimum reserve requirements imposed by the RBA. The RBA, in consultation with the Exchange Settlement Account holder, determines a minimum reserve requirement in proportion to the potential size of ‘after-hours’ payments to create a liquidity buffer. The minimum reserve requirement is set on an annual basis and must be maintained by banks at the close of business each day (RBA 2024b).

5.2 Overnight money market rates

I use overnight GC repo rates, rather than the (unsecured) cash rate, to estimate the demand for reserves. In the past, there was a convention by cash market participants to almost always conduct trades at the RBA's target rate (Kent 2024). While this convention is no longer in place, as evidenced by the cash rate trading below the RBA's target rate since the pandemic, many cash market participants still act as price-takers (Bristow and de Roure 2023). Price-takers will, by default, transact at the cash rate published each morning by the RBA which is based on yesterday's transactions (RBA 2022a). Since January 2022, only around 15 per cent of transactions took place at a rate different to the prevailing cash rate (Figure 8). The overnight GC repo market exhibits more price dispersion and a higher number of trades and volumes than the cash market (Bristow and Tang 2024).

As of October 2024, Australia does not have an overnight GC repo benchmark rate. I construct a GC overnight repo rate using trade-level data submitted to APRA by ADIs and registered financial corporations in ARF 721.0A and a methodology consistent with repo benchmarks in other jurisdictions such as SOFR (Secured Overnight Financing Rate) and CORRA (Canadian Overnight Repo Rate Average) (Federal Reserve Bank of New York 2022; Bank of Canada 2020). For more details see Appendix A. Recently, the ASX have begun publishing an overnight GC repo rate – the Secured Overnight Funding Index Australia (SOFIA). SOFIA's usefulness for estimation is limited by the period over which it is published: January 2022 onwards. I compare my calculated overnight repo rate to SOFIA to check the validity of my rate calculation (Figure 9). The two series have a correlation coefficient of 0.83 and my empirical results are robust to the choice of repo rate (see Appendix B.3 for details).

5.3 Deposits

For my measure of short-term liabilities, I use total ADI deposits as reported in APRA's monthly ADI statistics. Some reserve demand literature uses liquid deposits and other short-term claims on liquidity as they better represent liabilities which matter for banks' transactional and precautionary reserve demand (Acharya et al 2023). My empirical results are robust to a number of deposit measures including at-call deposits, uninsured deposits and total overnight/at-call liabilities.^[8] I also test whether adding credit lines affects my results but they are statistically insignificant (see Appendix B.1 for details).

5.4 The cost of collateral

I account for the value of collateral when estimating reserve demand via the GC repo rate. Using ARF 721.0A data, I proxy for the value of collateral using the proportion of total GC overnight repo turnover which is trading 15 or more basis points below the GC repo rate (Figure 10). In calculating the measure, I include the value of bonds lent overnight through the RBA's securities lending facility – RBA counterparties can borrow government bonds under repo via this facility at a rate of 20 basis points below the ES rate. My results are robust to thresholds ranging from 5 to 15 basis points below the GC repo rate.

The large increase in securities lending by the RBA coincided with the RBA owning an increasingly large share of AGS. Market participants estimated that the ‘circulating’ free float of some individual bond lines available in circulation was as low as 10 per cent of the amount on issue (Aziz and Jackman 2022). Starting in early 2023, there has been a reduction in collateral scarcity and consequently a fall in RBA securities lending volume and a reduction in the number of bonds trading special in the repo market (Bristow and Tang 2024).

Footnote

I construct total overnight funding using APRA form ARF 210.3.2 and calculate credit lines by aggregating LCR banks' total committed facilities, other contractual obligations to extend funds and other contingent funding obligations from Tables 14, 15 and 16 in LCR banks' reporting form ARF 210.1A. [8]