forget about SBV liabilities for a second, the real bailout story is the regime-change in the Fed's treatment of collateral:
par value goes against every risk management commandment of the past 30 years.
it turbocharges the monetary power of collateral
with 1990s shift in open market operations from outright purchases (of sovereign bonds) to repo loans against collateral (sovereign or other), central banks adopted 'modern' collateral valuation:
- collateral at market price rather than par
- haircut on market price
the logic was intuitive (and pleased German lawyers/monetarists greatly):
central banks' collateral framework must be conservative - with strict focus on high haircuts and collateral quality - to minimise moral hazard
until yesterday, in my 15 years of researching central banks collateral I have never heard one single central banker contesting this common wisdom: never, ever par value
we in Europe know painfully well how systemic haircuts can be - both for banks and for the sovereign issuers of bond collateral.
ECB used 50% haircuts on Greek sovereign bonds as a fiscal disciplinary device
imagine, for a second, that Trichet told every Greek bank tapping its LOLR in 2011 that it could get par value for its Greek government bond collateral, instead of 50% of market value.
the Euroarea would be in a very different place right now
had ECB done what Fed did yesterday, farewell my scholarship on #shadowmoney examining how pro-cyclical collateral treatment forced central banks to reinforce LOLR with market-maker of last resort
it is not yet clear to me whether the Bank Term Funding Program will mark collateral to market daily - in which case, this is a partial regime change, but wow.
Dan is right - this is a subsidy, this is why I called it the real bailout
the Fed's new collateral regime:
- all collateral owned before March 12 eligible
- fixed 1yOIS+10bp interest rate
- banks can unwind at any time without penalty (hi my mortgage lender)
Nothing on:
- collateral valuation
- no 25bn limit!
the US Treasury providing a USD 25bn 'credit protection' to the Fed is not the same as the Fed limiting the BTFP at 25bn.
It's just a 'hush the Germans' handwave.
increasingly convinced that Fed wouldnt accept par value for collateral on day 1 of BTFP loan, then mark to market on day 2 - it would automatically exacerbate bank funding pressures
So either Fed suspended collateral valuation permanently or reduced mark-to-market frequency
but then what would be the new frequency if not daily?
do you mark to market once a month and abandon the 'par value' collateral regime? any frequency threatens cliff effects
as @alexandrascaggs points out, some stressed US bank may not have enough BTFP eligible collateral - but am unclear what's the overall par value size of the eligible universe
when you go from protesting the bailout of tech bros to the German conservative position on sovereign debt in the next paragraph.
amazing how Sheila Bair, of all, would miss the macrofinancial aspects of the SVB affair, they're all gonna fall for the 'moral hazard for techbros' argument
a reminder that for years, conservative German voices fought hard at Basel and in European regulatory spaces to remove the risk-free treatment of sovereign debt in regulatory regimes.
their logic? periphery sovereigns should have all possible backstops removed.
a reminder half of UK workers will be on strike Wednesday the 15th just to try and make up a bit for the massive loss in living standards the Tories have inflicted upon us for the past 10 years.
a reminder that the history of banking is littered with banks' failed promises to convert bank deposits at par and on demand without the state, because state backing of that promise involves proper regulation - the social contract with banks.
JP Morgan, entirely relaxed about Silicon Valley Bank's transition from 'cash burn' to bank run
the question to me - maybe @RobinWigg has the answer - is why firesell US treasuries and agency when these are the easiest to repo and raise reserves?
Sillicon Valley Bank basically firesold 20% of its securities portfolio - the most liquid bits such as US government bonds - so it can meet deposit withdrawal requests that also draw down Fed cash (for settlement)
after decades of ordoliberalism and under the table state aid, “This is quick and dirty money to match the Americans,” said one person with direct knowledge of the EU Green Deal Industrial Plan
it is a measure of UK's irrelevance post #Brexit that nobody has noticed our Green Industrial Revolution
green derisking dreams with just £12bn of public resources dont exactly trigger a subsidies race.
@katie_kedward@jryancollins Macron's partnership with derisking evangelists is not new, neither surprising - Derisking as Development is now the status-quo approach to
a) development interventions (WB 'evolutions roadmap)
b) climate crisis
c) green industrial policy 'subsidies race'