BIS central bankers’ speeches  5  Preparedness to implement normalization Extensive testing of ON RRPs and other supplementary tools have provided policymakers with confidence that they will be able to maintain control over interest rates – that is, that rates will move up with increases in the IOER rate – during the normalization process. 12 An important determinant of the effectiveness of an ON RRP facility is whether a sufficiently wide set of nonbank counterparties has access to it. The New York Fed currently executes RRPs with 163 counterparties comprising many of the major cash lenders in secured and unsecured money markets – including money market funds that manage about 70 percent of the total U.S. money market fund assets under management and account for more than a quarter of total tri-party repo lending against government collateral. 13 This provides a high degree of confidence that we are transacting with an adequate set of counterparties to achieve our policy execution objectives. 14 Throughout the testing regime, the Desk has varied the settings and design of the reverse repo operations, with operational results informing subsequent changes. We’ve operated at different times of the day, increased the maximum bid limit per counterparty, and introduced an aggregate cap of $ billion and a single-price auction mechanism to allocate awards should the sum of submitted bids exceed the cap. We’ve also adjusted the offering rates and tested ON RRPs in conjunction with term RRPs at quarter-ends.
However, the ability of Asian banks to continue to take up the slack could be constrained by the already high loan-to-deposit ratio and limited access to US dollar funding. More importantly, it is doubtful whether these non-European banks would have the appetite to take up long-term project and infrastructure financing, which is a specialised business traditionally dominated by the European banks. Any cutback in infrastructure financing could have serious repercussions for developing Asia, which has a strong need to build and upgrade infrastructure networks to promote sustainable growth, create employment opportunities and boost competitiveness. ADB estimates that Asia requires as much as $ trillion in overall infrastructure investment between 2010 and 2020, with an average of $ billion in annual infrastructure spending. It is therefore vital to further develop the capital markets in Asia, in particular the local-currency bond markets, to effectively channel the region’s vast savings to meet its huge demand for infrastructure financing. Asian governments have been making efforts to develop the bond markets. At the national level, initiatives such as consolidation of issuance in a few benchmark maturities and development of interdealer markets have helped increase liquidity and improve reliability of yield curves in a number of jurisdictions. Meanwhile, collaborative efforts are being made in regional forums. A notable example is ASEAN+3’s Asian Bond Markets Initiative with the strong support from ADB. The Initiative has been looking into both demand and supply side issues pertinent to the development of the bond markets.