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Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System

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  • Zoltan Pozsar

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.

Suggested Citation

  • Zoltan Pozsar, 2013. "Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 22(5), pages 283-318, December.
    • Handle: RePEc:wly:finmar:v:22:y:2013:i:5:p:283-318
    DOI: 10.1111/fmii.12013
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    References listed on IDEAS

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    1. Holmstrom, Bengt & Tirole, Jean, 2000. "Liquidity and Risk Management," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 295-319, August.
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    3. Jeremy C. Stein, 2012. "Monetary Policy as Financial Stability Regulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 57-95.
    4. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153.
    5. Perry Mehrling, 2010. "The New Lombard Street: How the Fed Became the Dealer of Last Resort," Economics Books, Princeton University Press, edition 1, number 9298.
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    1. Bruce Tuckman, 2017. "Survive the droughts, I wish you well: Principles and cases of liquidity risk management," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 26(3), pages 153-172, August.
    2. Athari, Seyed Alireza & Isayev, Mugabil & Irani, Farid, 2024. "Does country risk rating explain shadow banking development? Insights from advanced and emerging market economies," Economic Systems, Elsevier, vol. 48(2).

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