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Several community banks have started offering correspondent banking services, while others are expanding their products. Still, many banks are wary about repeating the mistakes of the past.
February 25 -
The Fed alone - not actions by banks - dictates how large the reserve number is. And it is the Fed's expansion of its balance sheet that has ballooned reserve levels at banks.
April 1 -
While it may be true that some banks are stockpiling cash, high reserve levels are more a consequence of the reluctance to lend than the cause.
March 9
Community banks will soon have a new way to lend to each other, though it is unclear how eager they might be to participate.
The Chicago Board Options Exchange announced plans
The AFX, a partnership between the Chicago Board Options Exchange and Environmental Financial Products, is designed to offer a new liquidity option for the industry's smallest players. But it will likely be an uphill battle to convince bankers of the market's potential upside, several industry experts said.
"It's just not clear to me what the problem is" with the existing market, said Robert Chirinko, a finance professor at the University of Illinois at Chicago. "The federal funds market exists … and banks of all sizes participate in that."
The timing of the exchange's launch is notable, given lingering uncertainty over a possible rise in interest rates. The Federal Reserve is set to make an announcement on rates Thursday, and predictions about a short-term
"There's just so much uncertainty," said Lamont Black, a finance professor at DePaul University in Chicago, discussing broader market trends.
Richard Sandor, an economist and head of
Weekly interbank lending volume has plunged in recent years, totaling $62 billion on Sept. 2, according to
The exchange's founders plan to announce an official opening date by the end of this month. It will initially target roughly 1,700 banks with $500 million to $125 billion in assets.
"They're the ones that finance the Caterpillar tractors, housing and lots of other industrial products," Sandor said.
Most bankers contacted by American Banker declined to discuss the program, with some saying it was too premature to comment.
The exchange's appeal is tied to how the short-term lending market has changed since the financial crisis, said Bill Sirakos, head of capital markets at Cullen/Frost Bankers in San Antonio. Sirakos, who oversees the $28 billion-asset company's Fed funds desk, was involved in the exchange's design.
"Nobody was extending credit," Sirakos said, noting that he routinely had banks cut off during the crisis as Frost bulked up its own reserves. When the Fed began paying
"The system is so flooded with reserves," he said.
While interbank lending volume remains low, the AFX could have an immediate appeal to banks with strong lending growth, Sirakos said. It could also attract small banks looking for a cheaper way to participate in the interbank market.
The AFX will be a self-regulated market, Edward Tilly, the Chicago Board Options Exchange's chief executive, said during a conference call, adding that the exchange will operate outside of the purview of the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The Chicago Board Options Exchange will provide "electronic surveillance" to ensure that participants adhere to its rulebook, Tilly said.
The AFX will develop a new interest rate benchmark. The rate — Ameribor — will be determined by weekly auctions, which will begin in the fourth quarter. The benchmark could
"If you look at Libor, that's what it was supposed to be, until all of that hanky-panky got started," Sirakos said.
The new benchmark could create challenges for participating banks. It could create the potential for interest rate risk, or it could be intimidating for bankers who aren't interested in changing the way they do business, Black said.
"The question is how suspicious are smaller banks of Libor and the broader interbank market?" Black said. "How much are they willing to pay for a greater sense of comfort?"
Still, AFX executives sound optimistic. Plans are in place to create futures contracts on the exchange — similar to how Chicago Board Options Exchange developed the
"We hope … to create benchmarks that are reliable and that are determined by the forces of supply and demand," Sandor said. "Somewhere in this world that we're living in, there will be some bank that will use these tools for asset liability management."