The Bank of England has just announced it will now do exactly what I suggested above: type funds into the UK government’s account and give it a "ways and means" overdraft, just to keep the books in order.
People are beginning to understand how the system works. They are beginning to understand that governments in monetary systems such as our own can never run out of their own currencies. They are beginning to get modern monetary theory (MMT).
Meanwhile, the RBA Board announced a new target for the cash rate, and at the very same meeting announced a policy which guaranteed it would miss its target on the low side.
Hasn’t anyone noticed?...Is the BoE the only central bank that finally gets this?
Independent Australia
The Reserve Bank has got it wrong: Embrace modern monetary theory
Stephen Hail
Any one know how exactly the accounting is done for this?
ReplyDeleteDoes this work like how back in the day when the US tsy used to be able to have an overdraft, it's acct would go negative and at the end of the day the US tsy would issue a special certificate of indebtedness and the Fed would bring the tsy's acct back from negative? All the articles about this BOE stuff has been talking about an "overdraft"..
Or does HM Tsy just issue normal bonds that are bought by the BOE? But why is the Way and Means acct referred to as an "overdraft account"?
BOE passed a regulatory reform a couple years back that exempts their Depositories from having to possess capital against Reserve Assets...
ReplyDeleteSo it doesnt matter in the UK from a regulatory leverage aspect if a lot of Reserve Assets build up at their Depositories due to a lack of Treasury Securities issuance... which would normally "drain Reserves"...
I dont think this is the case in Australia and it certainly is not the case in the US...
I think in Australia if they just did what this author suggests they would cause a catastrophic shutdown of the Depositories.. would certainly do that here in the US...
Joe:
ReplyDeletehttps://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/publication/pra-statement-on-the-leverage-ratio-august-2016.pdf?la=en&hash=F50C86C8AAA788EBFAC159F009BBED7D2FE07B83
"The FPC recommends to the PRA that, when applying its rules on the leverage ratio, it
considers allowing firms to exclude from the calculation of the total exposure
measure those assets constituting claims on central banks where they are matched
by deposits accepted by the firm that are denominated in the same currency and of
identical or longer maturity. "
I believe they adopted this back a few years ago to my knowledge BOE is the ONLY system that exempts Reserve Assets from the computation of "total exposure measure" as they call it here...
So BOE can directly credit the Reserve account of the UK Treasury and then Treasury can then spend those balances resulting in an increase in Reserve Assets and Deposit Liabilities at the Depositories with no ill effects on the Depositories...
The UK is unique in this capability...
So when Tom asks rhetorically "Is the BoE the only central bank that finally gets this?"
ReplyDeleteIts not that they "get this!" its that they have modified their regulatory arrangements to allow these types of transactions in their fiscal operations..
They are the only global CB/Treasury that regulates their system this way...
"BOE passed a regulatory reform a couple years back that exempts their Depositories from having to possess capital against Reserve Assets..."
ReplyDeleteCould you expound on that a bit? What's it mean to have capital against a Reserve Asset? Reserve assets are risk-free, their value can't really go down, so how could capital ever be affected? The capital ratio is the percentage of a bank's capital to its risk-weighted assets, so reserves aren't in that, correct? I'm surely conflating some things here..
Double-entry bookkeeping wouldn't really allow what the article suggests. You can't just mark up the HM Tsy's reserve accounts without either marking down another BOE liability account an equivalent amount or increasing the assets of the BOE's. Correct?
" The capital ratio is the percentage of a bank's capital to its risk-weighted assets"
ReplyDeleteNo its the ratio of bank capital to TOTAL ASSETS... ie including Reserve Assets (a bank's deposits at the CB...)
(A-L)/A
Double-entry bookkeeping wouldn't really allow what the article suggests. You can't just mark up the HM Tsy's reserve accounts without either marking down another BOE liability account an equivalent amount or increasing the assets of the BOE's. Correct?
ReplyDeletegood question...
In the US, the Fed really only has an Asset listing... they dont publish a "balance sheet" though a lot of people call it that...
ReplyDeleteThey list what they call "Factors Effecting Reserve Balances" it is more or less the Assets the Fed has acquired by issuing Reserve Balances....
Fed doesnt really track its Liabilities per se... just its "Factors"...
So maybe BOE does the same they just Issue GBP Reserves to HM Treasury Account and just report that they have issued Reserves to the HM Treasury Account...
If the Treasury spends some of the balances then BOE just moves the balances to the total of GBP reserves at the BOE Depositories...
They can just let the reserves accrue at the Depositories as they dont have to worry about if the Depositories have enough capital to cover the Reserves...
Thanks, Matt.
ReplyDeleteSo in effect, these "factors" function as assets, as some sort of promissory note, for a very broad definition of promissory note (the the press reports are the UK govt will pay back the BOE). So there's probably some way of accounting for it.. But the main point is, and why everyone's hair is on fire, is that it's just the tsy and BOE interacting directly without the markets as an intermediary.. Whether it's a regular tsy bond, a special certificate of indebtedness, or just a negative balance, at the end of the day is of little consequence, in Britain anyways (due to their different capital rules)..
A few weeks ago you wrote (https://www.blogger.com/comment.g?blogID=2761684730989137546&postID=7639637326340751295)
(Asubrisk + Asubnonrisk - L) / (Asubrisk + Asubnonrisk) =. 0.095
reserves are part of Asubnonrisk. And if we remove equal amounts from the numerator and denominator (reserves no longer count), then the ratio goes down. Isn't that bad? I'm clearly missing something here.
It’s not that the ratio goes down it’s more that they don’t even compute the ratio...
ReplyDeleteThey just look at what is called the CAR Capital Asset Ratio which is like you say above “risk weighted”in UK these days... (Atotal -L)/Asubrisk
In US we have BOTH ratios 1 is risk weighted and 2 is non risk weighted...
With the Fed policy of adding all of these $trillions of non risk Reserves like today and 2008 only the 2nd one matters.... the risk weighted ratio is very largely exceeded during these policy times of massive adding of non risk assets..
Much appreciated Matt. Makes more sense now.
ReplyDelete