tag:blogger.com,1999:blog-8764541874043694159.post4356193775768290114..comments2024-03-28T07:33:46.151+00:00Comments on Coppola Comment: Grieving for Glass-SteagallFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger92125tag:blogger.com,1999:blog-8764541874043694159.post-84568281262600502522014-09-03T13:40:45.046+01:002014-09-03T13:40:45.046+01:00The temporary problem of liquidity but central ba...The temporary problem of liquidity but central bank support, there are several other assets for loans are important.Marry parkhttp://bridgingloans.guru/noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-13750343438700029952014-06-09T08:41:41.698+01:002014-06-09T08:41:41.698+01:00but the solvency of commercial banks is not effect...but the solvency of commercial banks is not effected by IB deposit withdrwals . its the commercial bank assets that are important . A large number of IB deposits would be a temporary liquidity problem and have central bank support...!!!agen judi onlinehttp://goo.gl/StzUWonoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-90260347792858118962013-07-21T17:42:03.942+01:002013-07-21T17:42:03.942+01:00Maggie's ghost: what is haunting Europe
http...Maggie's ghost: what is haunting Europe <br /><br />http://failedevolution.blogspot.gr/2013/07/maggies-ghost-what-is-haunting-europe.htmlsystem failure due to insufficient evolution?https://www.blogger.com/profile/06502935674214763698noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-87768113673878753742013-07-20T00:09:45.247+01:002013-07-20T00:09:45.247+01:00Not sure how it would be achievable in practice. B...Not sure how it would be achievable in practice. But certainly getting banks to pay more attention to the structure of the liabilities side of their balance sheet would be a good idea.Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-30621342339092346212013-07-19T10:26:02.181+01:002013-07-19T10:26:02.181+01:00OK i get it, you think that big liquidity squeeze...OK i get it, you think that big liquidity squeezes on reatil banks are a big enough problem in themselves. I agree.<br />How about this for a solution. Make Basel require banks to risk weight their depositors in terms of withdrawal risk. <br />What do you think.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-33668051472648382012013-07-19T10:18:33.343+01:002013-07-19T10:18:33.343+01:00I'm not saying either of those.
I am saying ...I'm not saying either of those. <br /><br />I am saying that when there is a massive bank run as there was in 2008, the ENTIRE financial system is involved. Trying to distinguish between different types of bank in the provision of liquidity support in a crisis is a fool's game. Even if sufficient liquidity support is available to commercial banks as you suggest, lack of liquidity in other institutions causes asset prices to fall, which threatens the solvency not only of investment banks but of commercial banks. Massive bank runs on the scale of 2008 have to be stopped, and if that means providing liquidity to anything and everything, then that is what the Fed will do. G-S will make absolutely no difference to that. <br /><br />More fundamentally, because investment banks are customers of commercial banks, when commercial banks are provided with liquidity support, that is in effect liquidity support of investment banks - just as it is of corporates and retail customers. G-S cannot prevent investment banks placing deposits with commercial banks. Nor should it. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-22106345383116967752013-07-19T09:39:51.535+01:002013-07-19T09:39:51.535+01:00I'm not defending G-S itself. I'm just def... I'm not defending G-S itself. I'm just defining the precise dynamics of finance. The goal of G-S is to let Investment banks fail without letting Retail banks fail. If, as you point out, Retail banks require some liquidity support in the process, than the goal of G-S is not thwarted, so your refutation of G-S based on <i>that particular</i> dynnamic is wrong.<br /> If you are saying that loans create deposits and so therefore the soundness of the nations currency as a whole can not be free from loan default risk, regardless of how deposits are treated, than I agree with that. I made that point myself earlier.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-44650459338277207772013-07-19T00:27:59.168+01:002013-07-19T00:27:59.168+01:00Again, g-s won't solve any problems
This is a ...Again, g-s won't solve any problems<br />This is a collateral based closed loop system.<br />In a closed loop, if something clogs in one spot, it affects the whole loop.<br /><br />The core problem is with the Commodity Futures Modernization Act that allows shadow banking to create naked leverage infinitely.<br />That's why there are runs in the shadow banking system which inevitably affect the commercial system due to plumbing as Coppola beautifully explains.<br /><br />There is only one solution:<br />- Regulate derivatives as they were before the CFMA was adopted.<br />- Define maximum leverage of derivativesEktrit Kris Manushihttps://twitter.com/ektritnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-39739355288937529092013-07-19T00:21:00.125+01:002013-07-19T00:21:00.125+01:00Might I suggest Modern Monetary Theory could provi...Might I suggest Modern Monetary Theory could provide an answer for a robot driven world.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-25335810183841257332013-07-18T23:16:19.660+01:002013-07-18T23:16:19.660+01:00Dinero, there is no difference between providing l...Dinero, there is no difference between providing liquidity to a commercial bank that is experiencing funding difficulties due to a run on investment bank deposits, and providing liquidity to the investment banks whose deposits are running. The liquidity provided to the investment banks goes to the commercial banks. It is exactly the same thing in practice. <br /><br />Commercial bank assets are important only to the extent that their values are affected by fire sales of the same asset classes by investment banks experiencing runs. What on earth makes you think that a G-S separation would end this sort of contamination? G-S would not stop commercial banks holding securities as part of their capital structure - and it wouldn't stop investment banks doing the same. <br /><br />Please don't wheel out the old chestnut about commercial banks having loans to investment banks on their balance sheets. It's not true. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-9083636279812061452013-07-18T23:12:23.703+01:002013-07-18T23:12:23.703+01:00Typo - A large number of withdrawls from IB depo...Typo - A large number of withdrawls from IB deposit accounts held at commercial banks Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-85838425325609009862013-07-18T23:07:55.326+01:002013-07-18T23:07:55.326+01:00Designing regulation for the future involves under...Designing regulation for the future involves understanding how the system actually works and where the risks really are. For me, the case for G-S simply is not made. There are other regulations that in my view would be far more effective in our current system, and we should be focusing on these rather than wasting time and energy resurrecting the ideas of the past.Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-75730837791770443202013-07-18T23:02:41.491+01:002013-07-18T23:02:41.491+01:00"a run on investment banks that impacted comm..."a run on investment banks that impacted commercial (clearing) banks in ways too large for them to handle"<br /><br />The question for me is whether G-S will reduce the likelihood that this happens again. Certainly alone it will not: we need reforms of both repo and wholesale funding markets too. G-S may give us more choices in the next crisis -- and I'm not sure that more can be asked of financial regulation.<br /><br />While I have great respect for the folks at the Fed, they played an important role in getting us here in the first place. I'm not convinced that they will be able to leave their faulty frameworks for understanding the economy and financial system behind and successfully design regulation for the future.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-73376099286967089732013-07-18T22:58:49.301+01:002013-07-18T22:58:49.301+01:00Further to my last....yes, Krieger does say that t...Further to my last....yes, Krieger does say that the Fed supported a primary dealer directly. But it had no choice. Primary dealers are not simply "investment banks", as you suggest. They are, in many ways, agents of the State. They are the principal means by which the Fed transmits monetary policy: they are required to participate in the Fed's open market operations and they are intimately involved in monetary policy decision-making. And they are the main market makers for government debt, participating in primary auctions and reselling government securities to the markets and the general public. No way is the Fed going to allow a primary dealer to fail. The consequences not only for the financial system but also for the economy as a whole are way too great. <br /><br />http://en.wikipedia.org/wiki/Primary_dealer<br /><br />Thanks, by the way. I appreciate the debate. <br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-59539877727160943832013-07-18T22:49:35.739+01:002013-07-18T22:49:35.739+01:00That is an interesting point about the knock on ef...That is an interesting point about the knock on effect of assets<br /><br />but the solvency of commercial banks is not effected by IB deposit withdrwals . its the commercial bank assets that are important . A large number of IB deposits would be a temporary liquidity problem and have central bank support. Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-39976231048062277782013-07-18T22:49:09.015+01:002013-07-18T22:49:09.015+01:00My "theories" are actually an accurate d...My "theories" are actually an accurate description of how the banking system works. I posted Krieger's speech because she makes the deep connections between investment and commercial banks (she calls them clearing banks) very clear. Sadly you have homed in on the bits of her speech that appear to support your mistaken idea of how banking works, and ignored the rest. <br /><br />The reason that "fire sales" were so dangerous was not just that they endangered investment banks. They endangered ALL banks, because the assets being sold to meet depositor claims were so widely held as collateral. Such a major fall in asset prices was disastrous for bank balance sheets of all kinds. This is important, but it is not directly the concern of this post. <br /><br />However, you've more than slightly missed my point. I did not claim that the repo run destabilised the system "via the payments system". I said that because a repo run takes place through the same set of commercial (clearing) banks and payment systems as retail and commercial transacations, it is not possible to deny liquidity support to investment banks being "run" upon without also denying liquidity for retail and commercial transactions. <br /><br />Where you go wrong is in your repeated assertion that 2008 was a run on investment banks "instead of" commercial (clearing) banks. Actually 2008 was a run on investment banks that impacted commercial (clearing) banks in ways too large for them to handle. Krieger used the term "liquidity disclocation", which is perhaps somewhat obscure but in effect means that commercial banks experienced severe funding difficulties as a consequence of the run on shadow banks. The Fed initially provided emergency liquidity support to commercial banks impacted by the run on shadow banking. It only extended support to shadow banks when the collapse of asset prices due to the continuing run threatened the entire banking system. And the aim was to stop the run. <br /><br />You will note that Krieger does not recommend G-S or anything like it. She recommends increasing the resilience of investment banks by improving their liquidity and capital buffers. And she suggests that ALL banks, commercial and investment, require central bank liquidity support both in normal times and in crises. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-51843693779221481782013-07-18T22:26:08.471+01:002013-07-18T22:26:08.471+01:00Just want to say: you're a really smart person...Just want to say: you're a really smart person. Your post on "Financial Dislocation" was brilliant.<br /><br />I really appreciate that you have continued this dialog -- I find it extremely useful to understanding, not just your comments, but those that others make about Glass-Steagall. It has also helped clarify my own views.<br /><br />Thank you for kindly providing a forum where this discussion can take place. Sites like yours are what give the web value.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-21240734620866151802013-07-18T22:24:40.209+01:002013-07-18T22:24:40.209+01:002007 and 2008 showed that banks fail primarily due...2007 and 2008 showed that banks fail primarily due to sudden outflows of liquidity. There may also be solvency issues, but the proximate cause of disorderly collapse is almost always due to lack of liquidity such as that caused by a bank run. Serious liquidity problems impact not only the institution itself but every institution with which it is connected - including the commercial banks which hold its cash assets. G-S does nothing whatsoever to improve the liquidity of investment banks. Therefore as far as the REAL danger to the banking system is concerned, it is useless. <br /><br />I would remind you also that because liquidity crises cause asset prices to fall dramatically, a bank can become insolvent as a consequence of a major run even if it was previously healthy. <br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-15597326477080267922013-07-18T22:17:39.761+01:002013-07-18T22:17:39.761+01:00From Sandra Kreiger:
"In March 2008,. . . it...From Sandra Kreiger:<br /><br />"In March 2008,. . . it became clear that neither clearing banks, nor overnight cash investors, were well prepared to manage a dealer default. . . . the liquidation of such large amounts of collateral under the extreme market pressures would have created fire sale conditions, large liquidity dislocations and undermined confidence in the whole market. To avoid these adverse systemic consequences, the Federal Reserve stepped in and created a special lender of last resort-like facility to lend to dealers against their tri-party repo collateral. The facility effectively backstopped the market in the immediate circumstances surrounding Bear Stearns’s failure."<br /><br />This supports my statement that the run on repo was a run on investment banking "dealers" and that the Fed's liquidity had the goal of saving investment banking, not commercial banking.<br /><br />"Runs absolutely can take place on investment banks, but the reason that they endanger the system is because all money transactions go through the same commercial banks and payments systems."<br /><br />The reason I find this so difficult to understand is that, as Krieger agrees, the dangers directly caused by the investment banking run are "fire sales." She does not state the repo run destabilized the system via the payments system, as you claim.<br /><br />I don't know whether G-S will be enough to prevent such Fed intervention to save investment banks not commercial banks from ever happening again, but I don't see why your theories, which are in fact inconsistent with the facts, should convince us not to try it.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-92186247103028529102013-07-18T22:04:00.822+01:002013-07-18T22:04:00.822+01:00Its of no consequence to GS if a few IB deposits a...Its of no consequence to GS if a few IB deposits are protected by providing temprary liquidity support to retail banks. What GS is concirned about is solvency issues of IBs destablising the system permanently, which under GS retail banks would not be permanently affected by.Dinerohttps://www.blogger.com/profile/14632385731642361211noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-49685430598989927942013-07-18T21:45:12.330+01:002013-07-18T21:45:12.330+01:00It simply is not possible for a cash run to take p...It simply is not possible for a cash run to take place on investment banks without affecting commercial banks. As I said, all cash sits on commercial bank balance sheets. No deposits can "run" without involving payments systems, and the gateway to those is via commercial banks. Even if cash is physically withdrawn from the system, that happens via commercial banks. You seem to think that somehow cash deposits managed to run without any impact on commercial banks. That is simply untrue - it was untrue in 2008, too. Commercial banks DID stop lending to each other after Lehman, and the Fed provided extraordinary liquidity support, initially to the commercial banks and to the investment banks/shadow banks that were the source of the run. Runs absolutely can take place on investment banks, but the reason that they endanger the system is because all money transactions go through the same commercial banks and payments systems. I don't see why you find this so difficult to understand.<br /><br />However, if you find my explanation insufficient, I suggest you read this speech by Sandra Krieger.<br /><br />http://www.newyorkfed.org/newsevents/speeches/2011/kri110308.html<br /><br />Your conclusion - that investment banking instablility justifies G-S - is illogical. Instability in the institutions being run upon is no justification for G-S, since G-S does absolutely nothing to prevent the Fed having to provide additional liquidity in the event of such a run. Nor does it do anything to regulate and stabilise the unstable institutions. It throws them to the wolves while failing to address the real issues. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-65155486976813773372013-07-18T21:03:35.394+01:002013-07-18T21:03:35.394+01:00"if the run is too big for commercial banks t..."if the run is too big for commercial banks to accommodate, or they stop lending to each other"<br /><br />My point is that the nature of our reserve system is that the run cannot be too big for the commercial banks to accommodate. As you noted, the reserves generally do not leave the system, thus the only problem that can arise is that the commercial banks "stop lending to each other."<br /><br />But in the U.S. in 2008, this did not happen. The commercial banks continued to lend to each other and the crisis was caused by the investment banks (yes, including the post G-S repeal commercial/investment banks) ceasing to lend to each other.<br /><br />You are attributing the 2008 crisis to events in the commercial banking system that never happened. "Commercial banks and payments systems are always at the heart of any bank run, whatever the nature of the institutions that are apparently being run upon." is an assertion that is not based on the events that actually took place. <br /><br />We have a system where runs can take place on investment banks. That is a fact demonstrated by the history of the 2008 crisis. What caused the run is a different question from whether or not at the time it was appropriate policy to protect the investment banking system from collapse. I actually think the policy was right, but the instability arose from investment banking, not commercial banking, and this fact implies that G-S is sensible policy.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-37590349752977878522013-07-18T20:45:38.584+01:002013-07-18T20:45:38.584+01:00I specifically said that money could be removed fr...I specifically said that money could be removed from the federal reserve system in the form of physical cash. <br /><br />You are still trying to create an artificial distinction between cash deposits created by repo and any other sort of deposit. That distinction does not exist in practice. ALL cash except notes and coins in circulation sits on commercial bank balance sheets. Therefore, if there is a run on cash funding of investment banks, BY DEFINITION there is also a run on commercial banks. As with any run, if it is not too big and the commercial banks themselves will lend to each other it can be accommodated without exceptional Fed liquidity support. But if the run is too big for commercial banks to accommodate, or they stop lending to each other, it is utterly insane then to say "no you can't have any more liquidity because it's caused by investment banks pulling their funds and we don't support those". <br /><br />Commercial banks and payments systems are always at the heart of any bank run, whatever the nature of the institutions that are apparently being run upon. Of course, if you closed down payments systems when a bank run started you would stop it in its tracks, but then you would stop everything else too. There is simply no way of continuing to provide normal OR exceptional liquidity support to retail and commercial payment services while denying it to investment banks. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-63598792952507795712013-07-18T19:50:12.016+01:002013-07-18T19:50:12.016+01:00You write: The banking system did not need extrao...You write: The banking system did not need extraordinary liquidity "if between them they already had enough reserves to support the outflows and they were wiling to lend to each other - although that wasn't the case after Lehman."<br /><br />Basics of modern monetary policy: If the banks don't "have enough reserves between them" the Fed will supply those reserves. You may call this central bank support, but it certainly is not extraordinary central bank support.<br /><br />The Libor market broke down after Lehman. The Federal Funds market did not, although there were a few unusually priced transactions on it during this time period.<br /><br />"The only way in which reserves can be reduced is by Fed open market operations, which as you say drive up the Fed Funds rate. "<br /><br />First, I consider in my discussion both the case of reserves being reduced and the case of them not being reduced.<br /><br />Second, this is in accurate. If I take cash out of my bank and put it under my mattress, I have reduced the reserves in the banking system. When I wrote this I was considering the possibility that the transfer of cash from the U.S. to say Germany would have a similar effect, i.e. a transfer of reserves out of the U.S. system and into the German one, but perhaps I'm failing to account for the foreign exchange market correctly.<br /><br />"Liquidity failures (bank runs or market freezes) cause asset prices to collapse, because when banks can't fund themselves by borrowing they are forced to sell assets at fire sale prices to plug their funding gaps."<br /><br />Well, yes. But in 2008, the asset price failures were not cause by runs on commercial banks, but by runs on investment banks (arguably including some of the post G-S repeal commercial/investment banks).<br /><br />I think there is a causality problem in your analysis. The fact that there is an asset price collapse does not imply that there was a run on commercial banks.<br /><br />You are using the word "deposits" in a way that unnecessarily confuses the issue. Wholesale funding is arguably comparable to deposits, and for that reason should probably be restricted or eliminated, but we survived the ABCP collapse of 2007 in relatively good shape (yes, with the help of the Fed).<br /><br />It was the repo runs of 2008 that almost did us in. And these were runs on investment banks and on investment bank funding, not on commercial bank funding. Using vocabulary that treats repos as "deposits" is misleading and has the effect of camaflouging the key role investment banking, not commercial banking or the payments system, played in the collapse of 2008.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-69647265894892817902013-07-18T18:45:41.183+01:002013-07-18T18:45:41.183+01:00Umm no. JPM etc. did need central bank support to ...Umm no. JPM etc. did need central bank support to do that. ALL payments need central bank liquidity. When deposits are pulled, payments are made. Central banks provide liquidity to support payments - it's a fundamental function of central banks. JPM etc. may not have needed EXCEPTIONAL Fed liquidity, if between them they already had enough reserves to support the outflows and they were wiling to lend to each other - although that wasn't the case after Lehman. But to say that they didn't need central bank liquidity is simply wrong.<br /><br />I think the flaw in your thinking comes from your notion that cash can "leave" the banking system - i.e. that in some way cash balances held by investment banks are not within the federal reserve banking system. This is wrong. Electronic cash never leaves the federal reserve system. Cash can only leave the federal reserve system as physical notes and coins, and then only until it is re-deposited. All electronic cash movements, whatever their source, occur WITHIN the federal reserve system. The only way in which reserves can be reduced is by Fed open market operations, which as you say drive up the Fed Funds rate. Movements of reserves around the banking system do not reduce the overall level of reserves, only their distribution. <br /><br />Liquidity failures (bank runs or market freezes) cause asset prices to collapse, because when banks can't fund themselves by borrowing they are forced to sell assets at fire sale prices to plug their funding gaps. Once again in your focus on the asset side you are not seeing the significance of deposits. It is deposits that run, not loans. Bear hedge funds closure caused asset price collapse because of the run on ABCP, not the other way round: admittedly the value of MBS was already dropping because of rising mortgage defaults (the subprime crisis), but the catastrophic fall in MBS prices that occurred after that closure was due to the run itself. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.com