Discussant: Stefan Gissler (Board of Governors of the Federal Reserve System).

Abstract: Interbank trading in the federal funds market has declined sharply since 2008,raising questions about its relevance for assessing banks’ liquidity conditions. This paper shows that the market continues to convey valuable information—not through bank-to-bank trading, but through the liquidity management behavior of the Federal Home Loan Banks (FHLBs), which now account for over 90% of daily lending. Using transaction-level data from the fed funds market and the Fedwire system, we show that FHLBs adjust their fed funds lending volumes, rates, and timing in response to daily liquidity outflows to their members, which use FHLBs as a source of funding or liquidity provision. On days with high outflows, FHLBs reduce early lending and shift volumes later into the day, pricing loans based on borrowers’ flexibility and proximity to counterparty limits. These behaviors reveal a clear pecking order among borrowers and help FHLBs retain cash to meet uncertain late-day demand. Aggregated indicators based on FHLB trading—such as late-loan spreads and the timing of intraday lending—predict periods of system-wide liquidity stress. These measures reliably align with known episodes of market disruption, including the 2019 repo spike, the COVID-19 shock, and the March 2023 banking stress. Despite reduced interbank activity, the fed funds market remains a reliable indicator of liquidity conditions.

Chair: Maria Teresa Gonzalez Perez.

Contact: Maria Teresa Gonzalez Perez.

Location: Meeting room DG Economics and Webinar.

Timetable: 2025.12.10 (12:00-13:30).