Good conclusion Meyrick, I look forward to Part 2 :-) I may have mentioned that I work in collaboration with my colleague who writes under the pseudonym BOOM. We correspond often and he recently observed that daily Repo was merely standard CB operations to support commercial banks. He says:
"Central Banks bail out the entire commercial banking system every night at Midnight. That is their prime role in the scheme of things. They can do that by creating assets out of thin air (as contracts) denominated in the national currency and loaning them to the retail banks who need overnight money to balance their Ledger.
They can repurchase these assets as soon as the bank no longer needs the money. The assets are called "Repos" -- Repurchase Agreements. None of this is ever revealed to the general public -- and for good reason.
They are not constrained in these operations. The "money" involved never goes into the real economy -- it is all held as "Reserves" in the banking systems Balance Sheets.
This is how the Reserve Bank of Australia explains it -- but I don't agree with their use of the term "as a cash provider" -- because they are not providing Physical Cash (!) -- just electronic Ledger entries. [I call it money, perhaps incorrectly]
'The Bank's open market operations'. Repos offer a flexible instrument for the Bank to manage the total amount of outstanding Exchange Settlement Account (ESA) balances in the banking system so as to keep the cash rate as close as possible to the target set by the Reserve Bank Board. By executing repos with its counterparties in its open market operations, principally as a 'cash' provider [I would say 'money'], the Bank manages the aggregate of institutions' ESA balances. Consequently, the Bank is a major source of funding for the domestic repo market.
There are three things that can make a bank Bankrupt:
1. A Debt Default/Falling Asset prices event that reveals a LOT of bad loans in their Loan Book (1929)
2. Widespread Inter-Bank Fraud or Shadow Banking (2007/2008) (1929)
3. A Run on the Bank's deposits. (1929)
All three can be patched up by the central bank. They only let a bank "go" in rare circumstances when it is beyond repair. [Cue Credit Suisse]
They can create money like this until the cows come home -- because it never escapes into the real economy. A Prudent bank should NEVER go broke. The problem is in the human beings that inhabit banks and can make very bad loans and gamble with the depositors money, shareholders funds, retained profits etc etc. "Oversight" by the central bank is supposed to avoid this risk."
As an aside: I wrote: "....growth is expected to slow sharply to 0.6% for 2023", This was from the OBR. Yet 9 months later OBR projects a 6% reduction in UK standard of living in 2023! I use this to illustrate that it might be fruitless to rely on published statistics.
I share a lot of your thoughts. Two places we differ may be:
1/ Reserve DO escape into the wild, because Fed reserves (and ECB & BoE reserves) are used to settle transactions between banks; reserves are the final settlement glue that holds the financial system together. If reserves are added to the Fed system, the turnover in reserves between US banks increases in proportion to total reserves. Those settlements are repo, securities, cross-currency basis and a bunch of other things. The distinction between inside money and outside money is artificial.
2/ SVB really did come out of the blue because the received understanding of a banking crisis was so clearly defined by the last liquidity crises (GFC & COVID19). Current circumstances do not match the expected conditions for a banking crisis. None of the stress tests in US or Europe foresaw a crisis emerging from high rates, an inverted yield curve, high inflation and a threat to HTM balance sheet from depositor flight totalling 20% of the balance sheet in a single day.
I guess you could say regulators 'live and learn' - except they really don't, because bank regulation assumes there can be parameters placed around deployment of money in search of return. That assumption is simply not true. Add in basic risk management errors from regional banks, and the deluge of deposits in 2020/21 they didn't know what to do with.
Of course, this is all a great excuse to expand the oversight.
Thank you for your wisdom Meyrick and very helpful for me as I try to project the next stage (if there will be one). My colleague at BOOM wrote this on Sunday and I posted today - perhaps it might chime - maybe I accord too much nous to the regulators!
Good conclusion Meyrick, I look forward to Part 2 :-) I may have mentioned that I work in collaboration with my colleague who writes under the pseudonym BOOM. We correspond often and he recently observed that daily Repo was merely standard CB operations to support commercial banks. He says:
"Central Banks bail out the entire commercial banking system every night at Midnight. That is their prime role in the scheme of things. They can do that by creating assets out of thin air (as contracts) denominated in the national currency and loaning them to the retail banks who need overnight money to balance their Ledger.
They can repurchase these assets as soon as the bank no longer needs the money. The assets are called "Repos" -- Repurchase Agreements. None of this is ever revealed to the general public -- and for good reason.
They are not constrained in these operations. The "money" involved never goes into the real economy -- it is all held as "Reserves" in the banking systems Balance Sheets.
This is how the Reserve Bank of Australia explains it -- but I don't agree with their use of the term "as a cash provider" -- because they are not providing Physical Cash (!) -- just electronic Ledger entries. [I call it money, perhaps incorrectly]
'The Bank's open market operations'. Repos offer a flexible instrument for the Bank to manage the total amount of outstanding Exchange Settlement Account (ESA) balances in the banking system so as to keep the cash rate as close as possible to the target set by the Reserve Bank Board. By executing repos with its counterparties in its open market operations, principally as a 'cash' provider [I would say 'money'], the Bank manages the aggregate of institutions' ESA balances. Consequently, the Bank is a major source of funding for the domestic repo market.
There are three things that can make a bank Bankrupt:
1. A Debt Default/Falling Asset prices event that reveals a LOT of bad loans in their Loan Book (1929)
2. Widespread Inter-Bank Fraud or Shadow Banking (2007/2008) (1929)
3. A Run on the Bank's deposits. (1929)
All three can be patched up by the central bank. They only let a bank "go" in rare circumstances when it is beyond repair. [Cue Credit Suisse]
They can create money like this until the cows come home -- because it never escapes into the real economy. A Prudent bank should NEVER go broke. The problem is in the human beings that inhabit banks and can make very bad loans and gamble with the depositors money, shareholders funds, retained profits etc etc. "Oversight" by the central bank is supposed to avoid this risk."
I guess the oversight was lacking in the case of SVB because it 'came out of the blue'. In my experience this is unlikely given the multitude of controls in place. It doesn't pass the smell IMHO. https://austrianpeter.substack.com/p/a-perfect-storm-the-money-crisis?s=w
Like you Meyrick I have been searching for some indicators which might give a heads-up to possible disruptions such as 16th September 2019. I wrote about it some time later: https://austrianpeter.substack.com/p/a-perfect-storm-the-money-crisis?s=w
As an aside: I wrote: "....growth is expected to slow sharply to 0.6% for 2023", This was from the OBR. Yet 9 months later OBR projects a 6% reduction in UK standard of living in 2023! I use this to illustrate that it might be fruitless to rely on published statistics.
Maybe Meyrick you might inprove my understanding?
Thanks for your comments.
I share a lot of your thoughts. Two places we differ may be:
1/ Reserve DO escape into the wild, because Fed reserves (and ECB & BoE reserves) are used to settle transactions between banks; reserves are the final settlement glue that holds the financial system together. If reserves are added to the Fed system, the turnover in reserves between US banks increases in proportion to total reserves. Those settlements are repo, securities, cross-currency basis and a bunch of other things. The distinction between inside money and outside money is artificial.
2/ SVB really did come out of the blue because the received understanding of a banking crisis was so clearly defined by the last liquidity crises (GFC & COVID19). Current circumstances do not match the expected conditions for a banking crisis. None of the stress tests in US or Europe foresaw a crisis emerging from high rates, an inverted yield curve, high inflation and a threat to HTM balance sheet from depositor flight totalling 20% of the balance sheet in a single day.
I guess you could say regulators 'live and learn' - except they really don't, because bank regulation assumes there can be parameters placed around deployment of money in search of return. That assumption is simply not true. Add in basic risk management errors from regional banks, and the deluge of deposits in 2020/21 they didn't know what to do with.
Of course, this is all a great excuse to expand the oversight.
Oh and I found this Meyrick - thoughts? Or misinformation, it's so difficult to tell these days? https://cryptoslate.com/is-the-crypto-industry-in-danger-vc-nic-carter-says-operation-choke-point-2-0-is-well-underway/
Some of the crypto ecosystem seem to be doing a fine job of undermining confidence without any help from the government.
Thank you for your wisdom Meyrick and very helpful for me as I try to project the next stage (if there will be one). My colleague at BOOM wrote this on Sunday and I posted today - perhaps it might chime - maybe I accord too much nous to the regulators!
https://austrianpeter.substack.com/p/crypto-tail-wags-banker-dog-the-consequences?sd=pf