Dr. Manmohan Singh on collateral banking
- Raghav Duseja
- Apr 4, 2021
- 2 min read
Summary points from this interview Dr. Manmohan Singh (Senior Financial Economist at the IMF) did with Caitlin Long (CEO and founder of Avanti Financial Group) on the launch of the 3rd edition of his book "Collateral Banking and Financial Plumbing".
Off B/S pledged collateral at Lehman bigger than that on B/S
Bank reserves are HQLA but sitting idle
Good collateral is very important
M0 M1 numbers not that important now
Good collateral can be used even if pledged
Regulation D in the US = half the collateral comes from the prime brokerage business, if I give 500₹ of collateral to Goldman and take a loan of ₹100, then Goldman cannot reuse full ₹400 collateral, it can only used ₹140 worth
In March 2020, off-the-run didn’t have a bid
Pledged collateral channel is shadow banking
Dollars are obligations of federal reserve and govt bonds are the obligation of the US treasury
But from risk perspective both same no? Both considered risk free, one pays interest the other one does not
Reuse rate of collateral (collateral multiplier) he says is 2.2
Data gaps don’t show in national accounts, US has flow of funds
First transaction between a hedge fund and GSIB is recorded but second and third use of collateral is not (as FOF picks up only B/S items)
The result is that leverage is underestimated
In March 2020, leverage was too much so off-the-runs didn’t have a bid —> maybe due to GSIB scores —> central bank had to come in for the off the run
Repo per B/S space — up didn’t com win as Repo per B/S not attractive in September
CCP may be the way to accommodate the glut of treasuries —> dealer B/S not being able to digest everything
Why collateral shortage in repo? Despite the overflow of treasuries
In March 2020, Treasuries exempted
Bank reserves are not moving —> but market wants treasuries —> even if both are HQLA
Silo-ing of reserves: When you purchase securities, you create bank reserves and those bank reserves are not moving
Even if good debt, there is tendency to silo them in central bank B/S
Problem is dealer B/S can only do so much
Markets wants more treasuries than cash because Treasuries can be rehypothecated
Bund yield is negative —-> but someone lending the Bund multiple times a year can still make good money
Why data so scarce on this total leverage?
Attenuation bias in econometrics
Average Treasury is rehypothecated 30 times says Raoul Pal — Dr. Singh says 2.2 times —this comes down on financial reporting end-of-quarter end-of-fiscal so that books seem better
Treasury fails
70-90% of printed money is sitting back in central bank B/S
Digital assets —> if GSIBs come in it’ll become difficult as digital may be curveball
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