Collateral flows lie at the heart of any proper understanding of market liquidity, and hence of financial stability. No other market is so critical to the functioning of the financial system, and yet so poorly understood. In addition, though, as policymakers begin to acknowledge the inadequacies of traditional theories of money and lending, collateral flows are increasingly recognized to be just as important a driver of credit creation as money itself. Despite this, a true appreciation of the importance of collateral flows is hampered by the inadequacy of the way in which they are accounted for.
"However, through the repledging and rehypothecation of collateral, and the resultant creation of “collateral chains,” additional purchasing power is created in the financial economy without a need for the creation of any additional bank deposits, bank reserves, government debt, private debt, or anything else for the matter. "
I cannot understand this paragraph. How can I purchase a piece of machinery without writing a check or giving cash to the seller? In my mind, purchasing power is always related to a bank accout or to cash in my pocket...
Let me explain why I'm puzzled better: If we say "additional" purchasing power is generated, to me this means "additional bank accounts" or "additional paper money". If otherwise, what do we mean by "purchasing power"?
On the other hand, if we say "in a repo, the purchasing power is transferred to the owner of the collateral for some short duration", then this (in my opinion), correctly describes what happens. But, in this case, no additional purchasing power is generated.
That's because you wouldn't use repo to purchase a piece of machinery or anything else that faces the retail consumer - it's only used in a wholesale finance environment.
Using collateral you can leverage your original position, use it to pledge to a CCP to initiate a new OTC derivative position, use it to settle your mark-to-market variable margin requirement, etc. All of these are forms of creating new purchasing power (leveraging original position, new OTC position) or transferring (settling mark-to-market VM requirement).
For large financial institutions, commercial bank deposits (unsecured liabilities of a private counterparty, uninsured above $250k, etc.) are generally considered more risky than high-quality collateral (unsecured liabilities of a highly-rated sovereign government) or MMF shares (which "hold" RRPs collateralized by USTs) and are, generally speaking, not used to settle transactions.
"However, through the repledging and rehypothecation of collateral, and the resultant creation of “collateral chains,” additional purchasing power is created in the financial economy without a need for the creation of any additional bank deposits, bank reserves, government debt, private debt, or anything else for the matter. "
I cannot understand this paragraph. How can I purchase a piece of machinery without writing a check or giving cash to the seller? In my mind, purchasing power is always related to a bank accout or to cash in my pocket...
Let me explain why I'm puzzled better: If we say "additional" purchasing power is generated, to me this means "additional bank accounts" or "additional paper money". If otherwise, what do we mean by "purchasing power"?
On the other hand, if we say "in a repo, the purchasing power is transferred to the owner of the collateral for some short duration", then this (in my opinion), correctly describes what happens. But, in this case, no additional purchasing power is generated.
That's because you wouldn't use repo to purchase a piece of machinery or anything else that faces the retail consumer - it's only used in a wholesale finance environment.
Using collateral you can leverage your original position, use it to pledge to a CCP to initiate a new OTC derivative position, use it to settle your mark-to-market variable margin requirement, etc. All of these are forms of creating new purchasing power (leveraging original position, new OTC position) or transferring (settling mark-to-market VM requirement).
For large financial institutions, commercial bank deposits (unsecured liabilities of a private counterparty, uninsured above $250k, etc.) are generally considered more risky than high-quality collateral (unsecured liabilities of a highly-rated sovereign government) or MMF shares (which "hold" RRPs collateralized by USTs) and are, generally speaking, not used to settle transactions.
buen articulo!! saludos desde argentina.
Thanks! Right up my alley!