Evolution of Treasury Cash Management during the Financial Crisis

This is technical topic so might not appeal to all. However, for those tracking Indian financial markets and particularly fixed income one, this topic has become important with each passing day.

So just a bit of a primer first. The liquidity situations remains tight in money markets leading to LAF Repo borrowing at more than Rs 1 lac Cr. This is higher than RBI’s preferred range of around Rs 60,000 Cr of deficit liquidity.

Much of the decline in liquidity is on account of decline/slowdown in forex flows (see my paper on this). This seems to have become structural issue on liquidity.

Barring this, RBI says problems also come from government’s cash balances maintained with RBI. By law, government is supposed to maintain a minimum of Rs 100 Cr with RBI. However, these balances could just go up on account of many government transactions. For instance, in case of advance tax-flows these balances just go up. And then suddenly decline as government  starts to spend.

Hence, these are lumpy and volatile flows in nature. In other words these are frictional issues wrt liquidity. The volatility  create in these flows create liquidity problems. When they rise, they drain reserves from the banking system and lead to tightening of liquidity. Likewise, when they decline liquidity eases. For banks this becomes a source of concern as suddenly liquidity dries up and then eases suddenly leading to volatile money market rates. This is a problem for RBI as well as it needs to provide liquidity.

Now, there is another issues with these govt. balances. The data wrt to these balances is not fully available. Why not fully? Well, WSS gives you the data (Table 1 Check Govt. Deposits in RBI’s Liabilities) but is not really the full amount. There seems to be some additional amount deposited with RBI but is not in public domain. Though, it shows in RBI’s quarterly macro report with a huge lag.

Coming back to the paper.

Paul Santoro provides an excellent account of how US Treasury maintains its balances with Fed. For instance, there are two cash accounts of US Treasury:

Like most households and businesses, the U.S. Treasury maintains a cash balance to buffer short-run fl uctuations in receipts and disbursements.  Unlike most households, however, the Treasury’s cash balance is highly volatile: between January 1, 2006, and December 31, 2010, it varied from as little as $3.1 billion to as much as $188.6 billion (Chart 1). The Treasury divides its cash balance between two types of accounts: a Treasury General Account (TGA) at the Federal Reserve and Treasury Tax and Loan Note accounts (TT&L accounts) at private depository institutions.

The behavior of the respective account balances changed dramatically in the fall of 2008. As shown in Chart 2, prior to the financial crisis that followed the collapse of Lehman Brothers on September 15, 2008 (hereafter, “the crisis”), the TGA mostly fluctuated in a narrow band around $5 billion while TT&L balances varied more widely. In contrast, since the fall of 2008, TT&L balances have fl uctuated in a narrow band around $2 billion and the TGA has varied widely.

The note goes on to explain  the details of working of TGA and how US Treasury/Fed coordinate to maintain this account. The paper goes on to explain how US Treasury does reverse repos to auction its surplus cash balances to the banking system. THis is something which is being proposed in India as well.

The paper also points nicely how TGA shaped up during the crisis. How  Treasury used Supplementary Financing Program to soak up excess reserves and to keep the federal funds rate from being driven down to zero.

Superb read. Technical though…

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