Williams expresses concern that financial innovation driven by regulatory arbitrage is a permanent environmental feature.
“I say this in part to convey a concern that while perhaps the upsides to innovation in intermediation are far larger than I at times perceive them to be, the downsides emanating from instruments and maturity transformation that are more plainly about managing regulatory processes seems a permanent feature of the environment.”
Williams says banks cite liquidity regulation changes and 24/7 payments transition as key drivers of reserve demand.
“Banks cite changes to liquidity regulations, as well as shifts in liquidity management amid the transition toward 24/7 payments and the adoption of payment innovations, as important drivers of their preferred levels over the next two years ( Panel 11 ).”
Williams notes survey respondents expect implementation and bank reaction to regulatory changes would take time.
“In addition, should changes materialize, respondents may think that it will take time to see them implemented, and possibly even more time for banks to react.”