thus moreover, competition may be imperfect in some money markets currently, allowing spreads to persist longer than they would if markets were more competitive. for example, much money market activity is over - thecounter, potentially leading to search frictions and bargaining. anecdotal evidence suggests that lenders typically interact directly with a relatively small number of counterparties, perhaps because a portion of the activity is derived from costly relationship lending. finally, to limit counterparty credit risk, lenders sometimes seek to diversify their lending and apply concentration limits, which are often binding. as i ’ ll explain, high - frequency variation in balance sheet costs could induce high - frequency changes in the pull of ioer and, in turn, the spread between the ioer and money market rates. we see this transitory dynamic around financial statement reporting dates. on these dates, balance sheet costs for some banks increase, and the fed funds rate and other money market rates fall relative to the ioer rate. while actions that increase bank reserves do not necessarily increase bank assets, evidence suggests that for lsaps conducted through 2012 : q3, assets were ultimately sourced primarily from non - banks – households ( including hedge funds ), broker - dealers, and insurance companies. all else equal, this would imply that the purchases increased bank assets. see carpenter, demiralp, ihrig, and klee ( 2013 ). even if bank assets do not increase, an increase in reserves could create distortions that raise balance sheet costs. this could happen if banks shift the composition of their assets to accommodate the increase in reserves, and in doing so are pushed away from their optimal balance sheet composition. these other tools include the term deposit facility, term rrps, and asset sales, each of which would have the effect of reducing the amount of reserves held by banks. money market rates would rise as reserves were made scarcer through the use of these tools. see martin, mcandrews, palida, and skeie ( 2013 ) for a theoretical exploration. bis central bankers ’ speeches strengthening the bargaining position of non - bank lenders. moreover, by reducing the amount of reserves held by banks, on rrps may directly reduce the level of bank assets and thus balance sheet costs. 10 if on rrps are offered at a fixed rate below the level of market rates that would be produced by ioer alone given prevailing frictions, the on rrps should not be an attractive investment option in normal times

this in mind. we also need to be careful not to underestimate the consequences of our actions. focusing only on direct channels, the effects that one would expect to ripple back to the united states from problems in one or two emes typically look quite small. but, when all of the indirect channels of feedback are aggregated properly – which admittedly is difficult to do – the effects may be considerably larger. my point is that we tend to underestimate these feedback effects. for most of us, the market volatility of this past spring and summer still remains fresh in our minds. eme financial markets were hit hardest, with declines in equity prices, a widening in sovereign debt spreads, and a sharp increase in foreign exchange rate volatility. in the u. s., we saw a spike in treasury yields, with 10 - year rates rising by roughly 100 basis points from early may to early july, and rising by roughly another 30 basis points before peaking in early september. most commentary has focused on the shift in expectations with respect to u. s. monetary policy – and, in particular, to uncertainty about the timing and implications of fed tapering – as the catalyst for these moves. this focus seems generally right, although other factors also played a role. market participants also had to evaluate the possibility that growth in china and other emes might be slowing even as growth in the u. s. and other advanced economies bis central bankers ’ speeches was picking up. the subsequent market movements as investors withdrew funds from eme investments were an abrupt shock for emes generally, especially after the long earlier period of abundant liquidity and ample inflows. from one perspective, the unconventional nature of recent u. s. monetary policy adds little that is fundamentally new to the challenges now facing emes. these policies simply represent a way of easing, driven by our coming up against the zero lower bound. central bankers have managed differences across countries in cyclical positions and policy stances many times in the past. but, from another perspective, we have less experience operating with unconventional monetary policy and this creates more potential uncertainties. this puts a premium on continued dialogue among central bankers, between central bankers and the market, and keen listening skills on our part. in my view, the fact that our large scale asset purchase programs affect the size of term risk premia globally is important. this set of monetary policies affects financial asset prices in a different way compared to changes in short - term interest