- Divergence Theme Questioned
- What to Expect from the Central Banks in 2017
- The ECB is Clearly NOT Hawkish
- Bank of England On Hold Until November
- Trump’s Proposal “Print the Money” Echoes Franklin and Lincoln
- Japan's Helicopter Money Play
- Brexit and the Derivatives Meltdown
- Central Banks Gaming
- Is that Buzzing Sound Helicopter Money?
- Is the Influence of the Central Banks Fading?
- Reinventing Banking
- Negative Interest, the War on Cash, and the $10 Trillion Bail-in
- The Future of Central Bank Monetary Policy
- Jeremy Corbyn’s Controversial Quantitative Easing Proposal
- Central Bank Season Heats Up
- Reserve Bank of New Zealand Rate Decision
- What has the ECB been Buying
- Four Central Banks Meet but FOMC is the Key
- Federal Overnight Reserve Repurchase Repo and Fed Funds Implications for 2015
- BoJ and ECB expected QE policies
- Unfitting Policies Will Not Save the Euro-area or Japan in 2015
- Can the $40 Drop In the Price of Oil Bankrupt the Biggest Banks?
- New G20 Banking Rules
- Central Banks Are Playing the Stock Markets
- A Public Bank Option for Scotland
- Preparing To Asset-strip Local Government The Fed’s Bizarre New Rules
- The Fed could Keep Rates at Zero through 2015
- Are Public Banks Unconstitutional? No. Are Private Banks? Maybe.
- New Challenges for an Old FED
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Not Sufficiently Liquid?
In a September 3rd press release, Federal Reserve Governor Daniel K. Tarullo stated that while “most state and municipal bonds are not sufficiently liquid to serve the purposes of HQLA in stressed periods... the liquidity of some state and municipal bonds is comparable to that of the very liquid corporate bonds that can qualify as HQLA.” [Cite] Criteria were being developed, he said, for considering these assets. But “it is important to get this final rule adopted now, so that the largest banks can begin to prepare for its implementation on January 1.” In the meantime, muni bonds are in limbo, and it appears that most will still not be accepted as HQLA.
The regulators consider stocks to be more liquid than muni bonds because they are readily traded on the stock market. But as the Martens’ note, stock markets can be quite inaccessible in a crisis. Quoting from the Fed’s own archives on the crash of 1987:
“Market makers in the over-the-counter market were not obligated to maintain an orderly market and many withdrew from trading. Delays in processing trades resulted in investors receiving prices very different from what they expected. Many brokers did not answer their phones, leaving investors unable to reach them. Erratic price movements and quotes resulted in frequent lock-ups in the electronic trading system used in the over-the-counter market.”
In any case, switching the banks’ holdings from muni bonds to corporate bonds or Treasuries is liable to have little effect in a crash. The stricter rules are supposed to be a defense against bank runs; but in a major derivatives bust and bail-in, the available collateral will go first to the derivatives claimants, through a massive concession to financial institutions in the Bankruptcy Reform Act of 2005. (See my earlier article here.) The FDIC and the depositors are both liable to be out of luck, no matter what form the collateral takes.
The Martens’ conclude:
“That the Fed and its regulatory cohorts have to resort to this implausible plan – which crimps the ability of states and localities to raise essential funds to operate – in a strained effort to pretend that they’ve found a means of avoiding another massive bailout of Wall Street in a crisis, is just further proof that the only way to seriously deal with too-big-to-fail banks is to restore the Glass-Steagall Act and break up these complex creatures before they strike again.”
Gordon Gekko Goes Muni?
The rule change may not have much effect in a crash, but where it will have a major effect is on the cost of credit, which will increase for municipal governments and decrease for corporate and financial institutions. The result will be to further shift power and financial resources from the public sector to the private sector.