Correlation is not causation, inverse or otherwise:
Just a reminder of how bank liquidity and the size of central banks' balance sheets have been unrelated (or maybe inversely correlated!) to the rate of inflation. pic.twitter.com/a8GPHrYFDD
— Andrea Terzi (@ndrea_terzi) May 23, 2018
14 comments:
Matt,
What's the craic on Ramanan's piece ?
Thanks.
Foot those USD swaps that Mike tracks are Fed interactions with foreign based depository institutions to provide NEW USD reserves under certain short term periods and conditions in their USD accounts at the Fed...
New/additional USD reserve balances have to be created to show up in the Fed “swap” line item...
Your friend might be talking about repo arrangements directly between 2 depository institutions themselves with no direct Fed involvement...
It's not my buddy this time I think the link is Jo Mitchell's blog.
Did you read the link he has laid it all out with the accounting.
Foot it looks way out of paradigm... talks about "what is money?!" and stuff... looks monetarist and a bit scare mongering... I'm just not into that type of stuff...
The depositories are all highly regulated so they have capital to cover all the assets they put on their balance sheets all the time...
Problems to the banks are all externally caused... ie price of loan collateral is reduced by producers... Central Bank moving rates... Central Banks forcing reserve assets onto them... wars... etc...
So Nick Edwards in the comment section is correct then ?
The investor’s liquidity is substantially the same under either the FX swap arrangement or the repo arrangement. In the first cash, she holds unencumbered yen cash; in the latter unencumbered treasuries.
It is not necessary for the investor to enter into a new repo arrangement in order to undertake new investment. She simply has to sell the treasury outright.
It is true that this has different consequences. It involves unwinding a long position in treasuries (which a new repo wouldn’t), whereas making a new investment in the FX swap scenario requires unwinding a long position in yen cash. These are indeed different in terms of the consequences for exposures going forward, but this has nothing to do with liquidity or leverage.
I think your argument assumes that a long position in yen cash is a nothing, so spending it on new investment has no consequences, unlike an outright sale of the treasuries. I don’t think that is correct – holding yen cash is a position, just like holding a treasury is. It’s simply a different one.
Thanks ?
I only drifted onto it because there was a brilliant article next to it about the Argentina crises.
The best I've read so far.
https://criticalfinance.org/2018/05/17/argentina-from-the-confidence-fairy-to-the-still-devilish-imf/comment-page-1/#comment-1958
Well what do you mean by "dollar stress" ? You mean the USD starts to go up vs. other nations currencies?
Or that there becomes higher need for USD reserves for use in settlements in USDs?
What is meant by "dollar stress" (figure of speech)?
Mike will look at the FX swaps and if there is nothing there then there is no world $ shortage. Compared with the $800 billion FX swaps at the time of the crash.
One of dozens of tools he looks at.
What Jo Mitchell is saying if they use Repo's instead of swaps then it doesn't show up and Nick above says that's not the case. Jo says most of them have been using repo's instead of swaps since 2016.
The BIS paper, by Claudio Borio and co-authors, argues that currency derivatives have allowed large volumes of Eurodollars to go missing from the balance sheets of financial institutions outside the US. If we were to properly account for this missing debt, then non-banks’ global dollar debt would double to USD 21 trillion. This is roughly equal to the value of global trade in 2017. How do USD 10 trillion go missing?
Spot + forward: buy USD spot with yen, use USD to purchase the US corporate bonds, and sell the same amount of USD forward.
FX swap: swap yen for USD with a promise to reverse the transaction at a later point, purchase the US corporate bonds.
USD Repo: keep the yen, finance USD corporate bonds by borrowing in the USD repo market, incurring outright debt.
The BIS paper warns that the first two strategies generate ‘missing debt’. Accounting rules demand repos to be recorded on the balance sheet do not impose the same recording requirements on fx swaps/forwards, except for mark-to-market values that capture the move in exchange rates[1]. This obscures the picture of global (dollar) liquidity, with serious implications for a future where central banks increase interest rates and unwind unconventional monetary policy measures.
In sum, fx swaps and repos are not equivalent transactions. At first sight, they seem to be the same animal: promises to pay at par supported by a similar process of preserving par via collateral management that creates mark-to-market funding pressures, firesales and liquidity spirals. The FX swap exposes investors to liquidity and rollover risk where the maturity of the asset purchased and the swap differ. The BIS is right to worry about such systemic issues, and what these imply for the Federal Reserve’s role in global dollar markets. But the similarities end there. Repos generate new funding for securities, whereas fx swaps do not, except when banks use their power to create settlement-money in the fx swap market.
Best bet would be to read it Matt even if it is out of paradigm then highlight the bits that are arse over tit.
Japanese banks’ search for yield has increasingly targeted dollar assets. Rich with yen liquidity from Bank of Japan’s QE, they swapped yen into dollars to lend directly, through capital markets, and until recently, through (repo) interbank markets. With the reform of US money market funds in October 2016,
Japanese banks have started to use repos for net funding of their dollar assets. In contrast, Australian banks’ dollar footprint, driven by carry trades, manifests as a form of match-book dealing in the repo-swap space. Australian banks first borrow dollars through (repo) interbank markets to lend these via swap markets in exchange for Australian dollars (AUD). This carry allows them to fund high-yielding AUD assets with cheap USD and hedge fx risk via the swap. Here the problems with the ‘fx swaps are functionally equivalent to repos’ argument become immediately apparent. Australian banks need to borrow USD first to swap into AUD.
Foot the Fed has to get involved only when the banks are made unable to deal in Reserves among themselves... so they are ok at this moment and are doing deals among themselves.... they will be fine until the govt implements a new harmful policy...
Thanks Matt
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