The Fourteenth Banker Blog

May 11, 2010

So What Will Banks Do This Time?

Filed under: Uncategorized — thefourteenthbanker @ 9:22 AM

The financial market action in Europe is raising concerns of another financial crisis. Interbank lending spreads are getting wider. European sovereigns and banks are being downgraded. The currency is plunging.

What will banks do this time? Freeze lending? Raise spreads and rates? Pass capital market funding costs through to businesses? Create instruments to pass risk to naive investors? Be vultures looking to feed? Lay off more workers?

In 2008 the divergence of Libor rates to Treasuries crashed the funding markets. The Fed cut rates to zero. They can’t cut rates anymore. Structural deficits will not allow much stimulus.

This time people will be watching much more closely. It is a time for citizenship. Some commenters have spoken about the self interested nature of corporations. They were not originally conceived to be so. It is time to take the name “Corporate Citizen”

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1 Comment »

  1. The banks will tap dance through their list of doctrinaire songs until they are backed in a corner with broken legs from the slip on the grease they did not see on the floor. So, why not look at some fun and games?

    The time will come when only radical solutions will hold societies together. There is an interesting set of models anyone can try out using the present member bank deposits balances at the FRB’s assuming all member banks take down their deposit balance to the levels of 2007. A small takedown can be accomodated using reverse repos and sending the acquired Treasuries to the banks with a corresponding charge to the member bank deposit liability. That is obviously short term and does not work at present aggregate deposit values. The member banks can take currency assuming that stocks are sufficient. That will not work because they would need to loan the currency and the bulk of the currency will shortly wind up back at the FRB that issued the currency.

    Does this not leave only creation of electronic funds on the same basis as currency to inject funds for lending where the funds stay circulating? Given the existence of electronic currency, the banks could loan trillions very fast. The FRB wires their deposit to the banks. That is they charge the deposit liability to the member bank and credit an electronic currency liability just as they now do paper currency. Now , this would be properly scary to a lot of people. It would solve the problem for the moment. One way out of the inflation angle would be for the Treasury to redeem Treasuries presented by banks with a special bank only form of United States Notes to take out excess liquidity circulating via Treasuries. This could be a separate electronic system too, but need not be. Getting even more scary for the doctrinaire?

    Something must be done. Everything has consequences. But, a lot of time might be purchased with electronic currency.

    The end result would be that mortgage backed securities owned by the FRB’s become the asset backing the electronic funds system. There is a huge supply at Fannie and Freddie. Make both special state banks and provide funds to the system using F&F. They can refinance loans till the cows come home.

    Congress would have had to already bepeed their drawers for the required changes to be enacted. But, my premise is that would be the best description at the time they acted or it all collapsed. It would take an American Caesar with the nerve of an Alexander too.

    Comment by Jerry J — May 11, 2010 @ 11:28 AM | Reply


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