After several weeks ago, the New York Fed was kind enough to tell us that absent perpetual expectations of Fed generosity, the stock market would be over 50% lower, today its intrepid bloggers focus on another critical aspect of the US financial system, and the Fed’s mediation thereof: namely visualizing the “plumbing” that keeps the financial system afloat. From the FRBNY: “On a typical day, more than $14 trillion of dollar-denominated payments is routed through the banking system. Critical to a well-functioning economy are the timing and smooth flow of dollars for large-value transactions and the infrastructure that enables that dollar flow. This financial market infrastructure provides essential economic services—“plumbing” for the economy—and is made up of a variety of entities.” How does this look on an hourly chart? Thanks to the Fed, now we know.
The actual flow of funds on any given day can be visualized below.
Funds flow and transactions settle throughout the day. Once a transaction is final, the recipient can use the money received to fund a later transaction. Most of the monies that are “recycled” are transferred either through large-value transfers or on the books of a settlement or clearing bank.
The hours during which the entities that participated in this study settle payments, as well as the peaks and valleys of those flows, vary considerably—as do these entities’ active settlement hours. Some systems operate virtually twenty-four hours a day, and others for only short windows of time. Real-time or multi-batch flow systems are active for more hours than batch systems that settle transactions once or twice a day. This does not, however, imply that they settle relatively more or less value.
The chart [above] shows consolidated hourly values of U.S. dollar funding flows for the entities that participated in the PRC study. The overall pattern is bimodal, with relative peaks at the beginning and end of primary eastern U.S. business hours. Before 08:00 ET, the aggregate value of payment flows is fairly low and primarily reflects activity in offshore and cross-border systems. As the day progresses, funds values increase: at about 08:00 ET, a number U.S. domestic entities open for business, and domestic payments and settlement of government securities pick up. Aggregate flows flatten out somewhat midday and then increase in the late afternoon as the end of the regular business day approaches. Activity falls off after 18:00 ET as most U.S. markets and systems close, and once again the remaining activity is related to overseas systems.
In this chart, the solid blue bars represent funding flows between entities, and the dashed sections show the specialized government securities clearing business within banks. The red lines show cumulative flows over the day.
As for what the basis of the $14 trillion in flows is, simple: the single biggest component is government securities clearing: the heart that keeps the ponzi system beating.
table below compares the aggregate values of transactions settled
within the participating FMUs and clearing banks, the cash needed to
effect these settlements, and the supporting amounts of funds that need
to flow to and from each entity. We refer to these as payment
transactions, funding transactions, and funding flows, respectively,
corresponding to the table’s columns from left to right. The following
example illustrates how the respective values would be calculated: A CCP
generally requires participants that owe money to the CCP (a “net
debit” position) to send those monies to the CCP (in a simple example,$10 billion). After the monies are received, the CCP pays out an equal
amount of value to participants ending the settlement period in a “net
credit” position (also $10 billion). In this example, the payment
transaction amount would be $10 billion, the funding transaction would
be $10 billion, and funding flows would be $20 billion ($10 billion
transferred from the net debit participants to the CCP and the $10
billion transferred from the CCP to the net credit participants).
the designs of FMUs differ, the relationships among these three values
vary considerably. Some FMUs offer internal processes specifically
designed to conserve liquidity. Some FMUs (such as Fedwire Funds and
Fedwire Securities) connect other FMUs and banks in real time and with
immediate finality. And other FMUs (for example, retail settlement
systems) use batch settlement processes that debit and credit transfers
of equal value among the bank accounts of payors and payees. Depending
on their designs, FMUs can conserve cash liquidity and provide other
efficiencies by standardizing rules, managing risks, and offsetting
transactions many times their gross settlement values. One approach is
not better than any other; they are just different.