repo

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Jean Erick

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Sep 28, 2019, 9:27:23 AM9/28/19
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     I’ve goggled bank repos but am not finding a clear explanation of their reason

Or action and timing.  I had thought they were to bring reserve requirements of banks

Back to requirements after a loan exceeded them.

I think I do have down that the dealer banks are the intermediaries between the Treasury and banks but

That’s all.

 

Joe?

 

James

 

Joe Leote

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Sep 28, 2019, 10:25:12 AM9/28/19
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If anyone drills down through the links below I suggest starting with the educational video and Lehman Brothers accounting example before reading the paper by Norman Bowsher.

In my SSRN paper published under the following link, during my research, I discovered that the aggregate bank uses repurchase agreements as a finance operation (liabilities management) to help manage the flow of interbank payments using reserves at the central bank:


This conclusion was based on the net repo liabilities in the flow of funds accounts and the discovery of this 6 page reference the paper by Norman Bowsher:


This informative 11 minute educational video describes the accounting for repurchase agreements in the context of using tangible assets collateral for a finance transaction:


This informative article describes example repurchase agreement accounting changes and different accounting options using the Lehman Brothers broker-dealer (not a bank) bankruptcy case study:


The banks use reserves as cash and the broker-dealers use bank deposits as cash on their respective balance sheets. An individual bank or broker-dealer can be a net lender of cash or net borrower of cash within its role in the credit system. The largest banks in the United States are usually owned by nonbank holding companies. I assume that the Fed uses its role as central dealer (the New York Fed runs the Open Market Desk) to enter the repo markets on a daily basis to execute its monetary policy strategy.

Two problems with repo in the financial crisis were re-hypothecation of the same collateral in multiple borrowing transactions and off-balance sheet accounting which hides leverage on the financial intermediary balance sheets. If the hidden leverage is driving an asset price bubble in the collateral markets then any effort to deleverage will collapse the price of assets. This dynamic pattern is common with other systems, e.g., biological populations under surplus and then shortage of resources, where it is called overshoot and collapse of the biological population. Environmentalists worry about the overshoot and collapse of human populations in a finite world but economists usually wave their hands and argue that innovation will solve these problems. There is mixed evidence for both positions based on historical case studies.

Joe


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Jean Erick

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Sep 28, 2019, 1:03:31 PM9/28/19
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     Thank you very much.  I suspect you have not red the Zoltan paper and recommend that you do.  Ex:  (reference to 1st line of your para below) Zoltan says the “money” of dealers is repos, which can be converted to the money of bank deposits but are not settlement funds until conversion.

With the exception of the Fed, the money of each layer is the liabilities of the layer above it.

 

Central bank exception (creates base money)

Banks money is reserves

Peoples money is deposits

Dealers money is repos

Money funds money is NAVs.

 

  The paper seems to be an explicit map of shadow banking structure, if not names of characters.  But assumes you know what a repo is.

Again John has referred to the insulation of reserves from the public and I saw the fact that reserves can be cashed out by the public.  The

Paper resolves that seeming conflict.  Reserves are the “money” of bank interaction only but they can be “converted” to cash by the public.

 

 

   I assume “re-hypothecation” means using the same collateral to back several different loans.  Sounds clearly  illegal, fraud.

If so, the phrase should not be used.  It’s an attempt to hide the bald crime involved.

 

Thanks again for your efforts.  I’ll be looking at this for some time.

 

James

Joe Leote

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Sep 28, 2019, 1:39:29 PM9/28/19
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I'll read the Zoltan paper more thoroughly when I get the chance. 

I think he means the dealers prefer to hold financial securities, rather than cash, in their asset portfolios. If the dealer needs cash to make a payment it borrows the bank deposits via a repurchase agreement using financial securities as collateral. This is shown in the accounting examples in the link provided. The repo is not a form of cash but a means to finance cash as necessary in the dealer business model.

Joe

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Jean Erick

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Sep 28, 2019, 1:44:08 PM9/28/19
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Video link goes to a pdf.

 

James

 

 

From: Joe Leote
Sent: Saturday, September 28, 2019 7:25 AM
To: Money Group
Subject: Re: repo

 

If anyone drills down through the links below I suggest starting with the educational video and Lehman Brothers accounting example before reading the paper by Norman Bowsher.

Joe Leote

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Sep 28, 2019, 1:45:47 PM9/28/19
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Email client seems to be playing tricks. Try this link to the video:


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Jean Erick

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Sep 29, 2019, 11:55:28 AM9/29/19
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Got it.  Thank you.

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