US Government Debt Different - Finance Department - University of ...

36 A Macro View of Shadow Banking: Do T-Bill Shortages Pose a New Triffin Dilemma?of 2007-09 was a crisis of the dollar-based international monetarysystem. The crisis brought to the fore fundamental questions aboutthe ultimate reserve asset and the meaning of “cash” for institutionalinvestors.The answers to these questions underscore that U.S. sovereign debtis indeed different.Banks’ funding base is often assumed to consist mainly of retail cashinvestors, or depositors, and interbank loans. This was the case decadesago, but no longer. In recent decades, banks have been increasinglyrelying on institutional cash investors for funding. The rise ofinstitutional cash investors as funding providers explains the rise ofwhat is referred to as wholesale funding.The aggregate volume of dollar-denominated institutional cash balancespeaked at roughly $3.5 trillion prior to the financial crisis,compared to the volume of about $6 trillion in insured householddeposits. In 1990, these figures were $100 billion and $3 trillion,respectively. Thus, at a macro level, the U.S. financial system’s fundingbase has gone from nearly 100% government-insured and hencestable deposits to one where the sources of funding were roughly2/3rd insured and stable and 1/3rd uninsured and instable. And thelarger wholesale funding got as a share of the banking system’s totalfunding base, the less effective the traditional banks’ safety net wasas a source of stability during systemic crises and during runs. Institutionalcash investors effectively lived under 1907-like conditionsprior to the crisis, without a safety net.Institutional cash investors fall into three categories: (1) foreign officialreserve managers; (2) global nonfinancial corporations; and (3)the asset management complex. Since the 1990s, all three categorieshave seen a dramatic increase in their volume of cash under management.First, foreign official reserves have grown as Chinese and other Asianreserve managers pegged their currencies to the dollar as a part oftheir export-oriented, mercantilist policies. Second, global corpora-