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The crisis of liquidity
Probably worth talk about how to manage liquidity western central banks - by
the example of the American Fed. Part of what is written below-platitudes, but
some details are not so widely known.
The main tool for the management of liquidity the Fed is interbank loan rate -
federal funds rate: USA all banks are required to maintain a certain percentage
of funds (defined by the volume of deposits) in Remortgages. As if the bank isunable to comply with reserve requirements, it had to pay significant fines.
Therefore, banks, which lack the reserves took them on the market. The loans
are issued for one day, without collateral.
Fed manipulates rate through short repo transactions: the purchase of
securities with an obligation to reverse repurchase (these operations can be
considered as the issuance of short-term loan on bail securities). The key may
be government bonds and bonds of agencies like Fannie Mae (having an implicit
government guarantee). For example, to lower the interbank bid, the Fed lends money to the bank and they shall credit to the reserve
account. As a result, the bank formed borrowed money surplus reserves,
which it can borrow in the interbank market.
The market is very small federal funds - borrowing daily volume of about 3 x
billion dollars. Nevertheless, the rate межбанка affects everyone else _ korotkie_ bets on the American market (eg межбанка rate may not be much lower than the repo rate - in this case, banks will
remain at the Interbank). Fed tries to ensure that the average rate on
borrowings Interbank match Trust value (the latter until recently was 5.25%,
and 18 September was reduced to 4.75%), defined FOMC - federal open markets
committee. In times of calm that is being made with a relatively high accuracy
in crisis - not necessarily.
When the market crisis Fed and the ECB (European Central bank) through repo
transactions issued a bunch of short - term loans to a month, anything in the
real short rates to levels below the target. Newspapers typically do not
explain how being injection of liquidity into the system, because of what
people often think that the central issue is not secured by mortgage loans or
buy every possible toxic waste.
This is wrong - doing all that the Central Bank - were given short loans at
high quality collateral. ECB and the Bank of Britain recently provided loans
and the longer period of time - three months, but did so at high rates, which
makes loans (at least in the case of the UK) is not in demand.
As short rates and Credit in dollars directly controlled by the Fed, no problems with the American (local) market borrowing short not. Nonetheless, a liquidity crisis is
far from resolved.
Causes of two.
First: As I wrote above, the root of the current crisis in that the banks,
funds, etc. Bad Credit Mortgages could not fund their structural positions - not because oftheir poor quality, but because of the fact that most investors could not
correctly assess these positions. Providing money on bail purchases regardless
of the interest rate by itself does not solve the problem.
At the Fed, of course, did not sit fools and understand the nature of the
current difficulties. As a tool for resolving the crisis, they tried to use the
discount window: apart interbank which rates the Fed
tries to keep close to their targets, but does not directly determine, there is
a so-called discount rate (the rate refinancing). This rate, under which the
bank may take directly from the Fed on bail securities of Lombard list. C 2002 year discount rate is set higher than the Mortgage and federal funds. Specifically, itsvalue is determined among other things, and even Finnish. top condition and the
borrower. Usually looking at the primary Mortgages - bid for the mostreliable banks. Until August, it maintained at 1% higher than the federal funds
rate.
In August, the Fed reduced the difference between the discount rate and the
federal funds rate to a half percent, the first set at the level of 5.75%.
Moreover, the list was expanded strongly that the banks can make as collateral
- and there have included a variety of ABCP and structured products, including
CDO.
Unfortunately, all this did not help much: banks, those critical problems with
liquidity was not, take a discount window did not want - it is carried out loan
at a rate higher rates Bad Credit and perhaps even on
bail. And every konduity funds and who would be happy to run their funding-CDO
positions at such rates in accordance with the rules of access to the Fed
discount window can be obtained only in cases of emergency.
Option whereby banks would provide money funds and konduitam bail their
structural assets, and then the banks would pull all this shit to the discount
window and would liquidity from the Fed did not work: the loan from any bankdiscount window clearly market participants interpreted as evidence of the
existence of Bank of the major problems (like all bad - they can no longer hold
on the market). And one that would be extra risk at the current situation
through the discount window, are likely to fairly soon would encounter problems
with the financing of assets.
Second: the greatest importance for banks has not reduced rate since September
American interbank market, as LIBOR - London Interbank Offer Rate bets on which
banks are members of the BBA - Brittish Bankers Assosiation willing to loan
dollars. It is this rate determines the cost of money for banks themselves.
As a sufficient number of Finnish international actors system have access to
the American market and hence to liquidity provided by the Fed, with short
rates are on LIBOR - much of the time they were close to the rates fed. funds.
The trouble with borrowing for periods of more than a month. According to
traders selling in the market there is no liquidity. And the situation foolish
- rates are quite high and people are ready for these loan rates are. However,
the willingness of the bank to take on such rates again brings the best of the
spread of unhealthy rumors. As a result, no one has. Given that the market for
short-term securities, was the second source of borrowing also rose, turned so
that all trying to occupy a minimum. What certainly does not help to do
business and creating problems for a wide variety of markets. Koncz world, of
course, no one is waiting, but on the other hand when the stop shaking his
incomprehensible. On the rest of the follow-up, if time will be.
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