The Fed quietly erased limits on the levels of emergency loans they can give any of the most giant USA banks….
Why, curious investors ask? Maybe
they think they may need to give unlimited maximal support to then real soon cuz of recent “deals” (e.g. big time shorting of the silver market and betting on crypto currency) those banks have made
worries about the “brilliant team” now actually managing the economy and dominating our politics seemingly not only having lost the compass, but not comprehending what a compass is….
That’s an easy question – they’re too big to fail.
From 2010 (Ben Bernanke): “A too-big-to-fail firm is one whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences.”
I also miss guardrails like good old Glass Steagal.
Glass Steagal decreed a hard line between regulated banks and investment banks. There wouldn’t be such a danger of failure by “too big to fail” banks if banks were not allowed to make risky speculative-type investments. Also, the regulations on capital are gradually being loosened.
Wendy
Bob, of course you are correct, but my post was NOT about the pros and cons of Fed being empowered to rescue us from financial catastrophe by making funds available in a crisis.
My WHY? is addressed to why we still have nothing like Glass Steagal, nor an explicit forward looking adaptation of what I have heard called “the Swedish process”, wherein gigantic bank bail-outs are in the form of a mandatory buy out, quasi-bankrupting and taking over the defaulting bank(s) and leaving the Execs and Board Members at least temporarily unemployed as they reflect on their decision making processes and incentives.
IIRC, back in the 90s was when “de-regulation” of financial businesses occurred. Savings & Loans had a separate lane from Investment Brokers from Insurance Co., etc., etc., etc. Then the one stop shop was allowed to happen. Great for consumer convenience in the short term, not so much long term it seems.
REPO and ONRR are a standard feature for the current fed. They provide instantaneously short term liquidity to aid in settling accounts.
We will continue to see period end (quarter, monthly and annual) witching events which require these facilities to be used.
I goodly portion of that interview relies on “Now what” after those Repo transactions occur.
Put simply, it’s carried interest. With liquidity preserved, this becomes a short-term interest obligation which is carried at the prevailing FFR.
There is no cliff, but there will be a slippery slop and worsening short term interest expense if those balances get excessive and begin to have some duration.
No duration, no problem.
No excess, no problem.
Look for BOTH to be present before pulling the fire alarm.
