These longer-term money market rates are important to U.S. domestic activity to be sure, but they are also of significance abroad, especially in countries with highly trade-oriented economies. In this regard, we have seen continued growth in recent years in the stock of loans linked to U.S.-dollar LIBOR made to non-U.S. firms. As shown in Figure 14, the Desk estimates that U.S.-dollar cross-border bank loans to non-U.S. residents that could be directly or indirectly impacted by U.S.-dollar LIBOR—the sum of the three columns in the panel—total about $ trillion, a significant portion of which is in developing economies. This reflects both the deep,  10  liquid, and global nature of U.S. financial markets, as well as the dollar’s role as a reserve currency and the primary currency used for international trade. My assessment is that the increased supply of Treasury bills and shorter-term Treasury coupon securities has played an important role in putting upward pressure on these rates at times. I think there is also evidence that other policy drivers have played an important role. For example, the recently enacted Tax Cuts and Jobs Act (TCJA) provides for “deemed repatriation” of corporate profits that had not yet been subjected to taxation in the United States. It appears that some corporations that previously had significant untaxed earnings—and that previously held large stocks of cash on their balance sheets—have begun to alter their capital structures, either by distributing cash held on balance sheet as dividends or by investing it in other assets.

Staff at the Federal Reserve has been using new data sets, analytics, and extensive market intelligence to deepen our understanding of the impact of these changes on money market dynamics. What follows is an illustration of this enhanced understanding. In the pre-crisis monetary policy framework, banks’ regulatory obligation to hold reserves was primarily driven by the required reserves framework, set forth in the Federal Reserve Act and Regulation D. 21 This framework involved banks meeting their requirement over a 14-day reserves maintenance period, as well as various other incentives that promoted short-term, but not extremely high-frequency, bank balance sheet management activity to maintain reserves at required levels—and the Federal Reserve had built analytics to provide good visibility into it. Today, while the Regulation D framework is still around, it is no longer likely to be the binding constraint on reserve levels for most large banks. 22 The new factors driving reserves demand appear to vary by financial institution, and seem to depend on a complex interplay of numerous new features of the financial system. On the regulatory side, these include the Liquidity Coverage Ratio (LCR), banks’ internal stress tests of their liquidity adequacy, supervisory expectations related to banks’ ability to monetize their liquidity portfolios during periods of financial stress, and the incorporation of liquidity into resolution planning. Other important factors include increased bank aversion to incurring intraday overdrafts, higher bank investor and creditor expectations for liquidity, and a lower opportunity cost of holding reserves relative to before the crisis.