institutional cash pools and the triffin dilemma of the u.s..pdf

WP/11/190 Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System Zoltan Pozsar © 2011 International Monetary Fund WP/ 11/190 IMF Working Paper Research Department Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System1 Prepared by Zoltan Pozsar Authorized for distribution by Stijn Claessens August 2011 This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Abstract Through the profiling of institutional cash pools, this paper explains the rise of the shadow banking system from a demand-side perspective. Explaining the rise of shadow banking from this angle paints a very different picture than the supply-side angle that views it as a story of banks’ funding preferences and arbitrage. Institutional cash pools prefer to avoid too much unsecured exposure to banks even through insured deposits. Short-term government guaranteed securities are the next best choice, but their supply is insufficient. The shadow banking system arose to fill this vacuum. One way to manage the size of the shadow banking system is by adopting the supply management of Treasury bills as a macroprudential tool. JEL Classification Numbers: E4; G2 Keywords: institutional cash pools; shadow banking; Treasury bills; money;