For modern financial systems, the key distinguishing characteristic of banks is that they key managers of the liquidity of the system. Although one can find small banks (or community banks) that operate on more traditional lines, banking firms are diversified and operate in the capital markets as well taking in deposits and making loans in the manner described in most banking primers. What differentiates banks from other financial firms is that they are in the business of selling liquidity via credit lines. In order to credibly offer that service, the banks themselves have to been seen as being unquestionably liquid.
I wonder how the following passage works in light of the Silicon Valley Bank failure?
"In practice, this does not happen (outside of old movies and fevered internet theories). Even if a run occurs, it will take some time to get momentum."
The SVB failure was triggered by capital adequacy concerns but the bank was brought down by liquidity issues that developed within a day or two.
What's your thoughts on the Short Term Repo facilities that are springing up at the central banks as QE is reversed?
It seems to me that the Central Banks are trying to get away from the political problem of paying interest on reserves by trying to manoeuvre the banks into a position where they are regularly borrowing liquidity from the central banks against government bond collateral. Then it is the Treasury that is paying 'interest on reserves' on the liquidity collateral.
Having banks permanently borrowing from the central bank is a change of stance for most of the world's banking system. It only seems normal(ish) for the Fed.
I wonder how the following passage works in light of the Silicon Valley Bank failure?
"In practice, this does not happen (outside of old movies and fevered internet theories). Even if a run occurs, it will take some time to get momentum."
The SVB failure was triggered by capital adequacy concerns but the bank was brought down by liquidity issues that developed within a day or two.
What's your thoughts on the Short Term Repo facilities that are springing up at the central banks as QE is reversed?
It seems to me that the Central Banks are trying to get away from the political problem of paying interest on reserves by trying to manoeuvre the banks into a position where they are regularly borrowing liquidity from the central banks against government bond collateral. Then it is the Treasury that is paying 'interest on reserves' on the liquidity collateral.
Having banks permanently borrowing from the central bank is a change of stance for most of the world's banking system. It only seems normal(ish) for the Fed.
The BoE's thinking is here: https://www.bankofengland.co.uk/markets/market-notices/2022/august/explanatory-note-on-operational-implications-of-apf-unwind