Here's a translation of the statement from the PBoC announcing the start of the monetarist policy that created the current round of global asset price instability:
2. What are the main considerations for the central bank to replace the medium-term lending facilities through RRR cuts?
A: The main purpose of this RRR reduction is to optimize the liquidity structure and enhance the financial ability of financial services. Currently, with the increase in credit supply, the medium and long-term liquidity demand of financial institutions is also growing. At this time, appropriately reducing the statutory deposit reserve ratio and replacing some central bank borrowing funds can further increase the stability of the banking system funds, optimize the liquidity structure of commercial banks and financial markets, reduce the bank capital costs, and thus reduce corporate financing costs. At the same time, the release of about 750 billion yuan of incremental funds can increase the financial institutions' support for small and micro enterprises, private enterprises and innovative enterprises, promote the vitality and resilience of economic innovation, enhance the growth of endogenous economic growth, and promote the healthy development of the real economy. .
They, in monetarist fashion, created an additional 750B yuan of reserve assets at the depositories to "lend out"...
People's Bank of China
Statement from Monetary Policy Division
At the same time, the release of about 750 billion yuan of incremental funds ... PBoC
ReplyDeleteWhat does "release" mean? What if the PBoC just GAVE the banks 750 billion yuan? The increase in Equity would certainly increase their ability to lend.
they exchange CNY reserve balances for foreign currency balances which increases non risk assets at the depositories.... when before as foreign exchange balances of firms they would be non bank assets ....
ReplyDeleteCB (govt) directly controls the level of reserve balances (non risk assets) at the depositories...
“Increase in equity”
It’s NOT an increase in equity...
(Get your nose out of the Old Testament it’s turning your brains ability to abstract into mush.... and Take a fing accounting course already....)
LHS entry is Reserve Assets RHS entry is Deposit liabilities... equity isn’t effected...
Equity is constant so the regulatory ratio would drop below threshold unless they didn’t reduce risk assets immediately in response... like we’ve seen ...
The 3rd sentence is a continuation of the "What if" in the 2nd and would increase Equity, i.e. if a Central Bank were to gift a bank some reserves, then Equity would increase by the amount of the gift.
ReplyDeleteBut thanks for the info about non bank assets, i.e. assets that are not on the bank's balance sheet such as foreign exchange and which therefore might not affect the Supplemental Leverage Ratio. However, for what it's worth:
And, unlike other leverage requirements, the SLR includes both on- and off-balance sheet exposures in a
“total leverage exposure.” from https://www.bnymellon.com/_global-assets/pdf/our-thinking/arriving-at-new-capital-ratios.pdf
“if a Central Bank were to gift a bank some reserves”
ReplyDeleteCan’t happen...
Reserves are on the left and equity is on the right...
ReplyDeleteThe gift would increase Assets without increasing Liabilities and thus increase Equity 1-for-1 with the gift since Equity = Assets - Liabilities.
ReplyDeleteCB could perhaps purchase shares in the bank with reserves in a manner you describe...
ReplyDeleteBut that is not a “gift” it’s an investment...