1/ NEW ARTICLE abt why USD-collateralized #stablecoins shld be backed 100% by cash deposited at Fed. Even T-bills don't work--bc they settle next day, but last wk a stablecoin collapsed w/in hours. Need *real-time* liquidity (only avail at Fed).@RiskDotNet
risk.net/comment/794869…
risk.net/comment/794869…
2/ This is another in a long collaboration w/ Dr. Manmohan Singh of @IMFNews about financial sector plumbing. He has taught me so much over past decade.
Sum:
* D.C. policymakers are moving away from view that #stablecoins should be issued only by insured depository institutions
Sum:
* D.C. policymakers are moving away from view that #stablecoins should be issued only by insured depository institutions
3/ That's good IMHO bc deposit insurance funds should be insulated from crypto--bc settlement differences are too big (could trigger runs on banks at financial system core). Policymakers r moving toward ring-fencing the risk as they should IMHO
* Next ?=back w/ T-bills or cash?
* Next ?=back w/ T-bills or cash?
4/ The credit risk in T-bills & cash on deposit at Fed is equal, but
(a) v diff liquidity profile. T-bills settle next day, which is too slow amid a #stablecoin run +
(b) using T-bills creates collateral silos, exacerbating periodic collateral shortages in wholesale funding mkts
(a) v diff liquidity profile. T-bills settle next day, which is too slow amid a #stablecoin run +
(b) using T-bills creates collateral silos, exacerbating periodic collateral shortages in wholesale funding mkts
5/ Article dives into plumbing of intraday bank liquidity (gets wonky). Some types of intraday liquidity for T-bills r only avail to big banks tho & as more community banks (that do maturity transformation) hold #stablecoin deposits for issuers, system-wide liquidity risk goes up
6/ * Next ?=bank or non-bank?
Article goes into why Federal Reserve Act only makes Fed master accounts avail to *depository institutions* (not non-banks) & how system-wide intraday liquidity programs have been fine-tuned to the term structure of bank liabilities in status quo.
Article goes into why Federal Reserve Act only makes Fed master accounts avail to *depository institutions* (not non-banks) & how system-wide intraday liquidity programs have been fine-tuned to the term structure of bank liabilities in status quo.
7/ As the term structure of bank liabilities shrinks from days (ACH) & hours (Fedwire) to just minutes (#stablecoins + soon #FedNow), banks will inherently need more intraday liquidity. This means the fine-tuning for system-wide intraday liquidity will inherently need to change.
8/ It was fun to write this over the past few weeks & see how it fits into real-time market events & the evolution of D.C. policymaker conversations. Lots of learnings. Lots of downside to getting policy wrong on this point. Enjoy!
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