RedMarx

A Forum
It is currently Sat Jun 24, 2017 3:43 am

All times are UTC - 6 hours [ DST ]



Welcome


Post new topic Reply to topic  [ 11 posts ]  Go to page 1, 2  Next
Author Message
 Post subject: a bank depositing its money at another bank?
PostPosted: Wed Jun 15, 2016 1:21 pm 
Offline
Comrade
User avatar

Joined: Thu Dec 27, 2012 6:10 pm
Posts: 416
Has thanked: 26 time
Have thanks: 31 time
When the state 'bails out a bank', it is borrowing its money to a private bank. Essentially it's the same as ordinary inter-bank loans, if instead the bail out had been done by a central bank.

But what if the central bank merely deposits its money at an account of a private bank, the same as when a citizen deposits their money at the bank. What is the difference? The private bank can use both the borrowed as well as the merely deposited money, for its activities. In one respect, the deposit seems even more useful for the bank, since unlike a loan it has no definite repay date. On the other hand, a deposit can withdrawn at any time. It seems such a solidarity of "inter-bank deposits" among (central and) private banks exists.

Below I post the article from the FT where I found this mentioned in passing (I post it in it's entirety, because the rest is also interesting).

Is it not counter to the essence of the banking business (which is to collect as much deposits for itself as possible)?



Quote:
BIS gold swaps mystery is unravelled

Deals that sparked a sharp price fall were ‘mutually beneficial’
July 29, 2010

by: Jack Farchy and Javier Blas in London

Three big banks – HSBC, Société Générale and BNP Paribas – were among more than 10 based in Europe that swapped gold with the Bank for International Settlements in a series of unusual deals that caused confusion in the gold market and left traders scratching their heads.

The mystery of who was involved in deals with the BIS, the bank for central banks, and what they were doing, has become clearer.

The Financial Times has learnt that the swaps, which were initiated by the BIS, came as the so-called “central banks’ bank” sought to obtain a return on its huge US dollar-denominated holdings. The BIS asked the commercial banks to pledge a gold swap as guarantee for the dollar deposits they were taking from the Basel-based institution.

When news of the swaps, which were disclosed in a note to the BIS’s latest annual report, circulated among traders this month, it caused a sharp fall in the gold price, sending bullion to what was then six-week lows. Gold has since fallen further: it was trading at $1,164 an ounce on Thursday.

Some analysts speculated that the swap deals were a surreptitious bail-out of the European banking system ahead of last week’s publication of stress tests. But bankers and officials have described the transactions as “mutually beneficial”.

“The client approached us with the idea of buying some gold with the option to sell it back,” said one European banker, referring to the BIS.

Another banker said: “From time to time, central banks or the BIS want to optimise the return on their currency holdings.”

Nonetheless, two central bank officials said some of the commercial banks also needed the US dollar funding and were keen to act as a counterparty with the BIS. The gold swaps began in December and surged in January, when the Greek debt crisis erupted and European commercial banks were facing funding problems.

Jaime Caruana, head of the BIS, told the FT the swaps were “regular commercial activities” for the bank.

In a short note in its annual report, published at the end of June, the BIS said it had taken 346 tonnes of gold in exchange for foreign currency in “swap operations” in the financial year to March 31.

In the same fiscal year, the BIS took three times the amount of currency deposits it had taken the previous year as central banks around the world became concerned about using commercial banks for their deposits and turned to the Basel institution.

In a gold swap, one counterparty, in this case a bank, sells its gold to the other, in this case the BIS, with an agreement to buy it back at a later date.

The gold swaps were, in effect, a form of collateral against the US-dollar deposits placed by the BIS with commercial banks. Gold is widely regarded as one of the safest assets, but has not been widely used as collateral in the past. Mr Caruana described the transactions as “loans with a guarantee”.

Investors have bought physical gold in record amounts during the past two years and deposited it in commercial banks. European financial institutions are awash with bullion and some are trying to pledge gold as a guarantee.

George Milling-Stanley, managing director for government affairs at the industry-backed World Gold Council, said: “The gold swaps commercial banks carried out with the BIS demonstrate the effectiveness of gold as an asset class, because even in the depths of the worst liquidity crisis in living memory, institutions with access to gold were able to make use of it to generate dollar liquidity.

“The issue also feeds right into the current debate among Asian central banks about the lack of assets suitable for use as cross-border collateral.”

Last year, CME Group, the world’s largest derivatives exchange, allowed investors to use gold futures as collateral for some operations. Other institutions, such as central banks, had begun using and requesting gold as collateral in the past two years as perceptions of counterparty risk have risen, bankers and officials said.

The gold used in the swaps came mainly from investors’ deposit accounts at the European commercial banks. Some investors prefer to deposit their gold in so-called “allocated accounts”, which restrict the custodian banks’ ability to use the gold in their market operations by assigning them specific bullion bars. But other investors prefer cheaper “unallocated accounts”, which give banks access to their bullion for their day-to-day operations.

Officials said other commercial banks obtained the gold from the lending market, borrowing bullion from emerging countries’ central banks.


Report this post
Top
 Profile  
 
 
 Post subject: Re: a bank depositing its money at another bank?
PostPosted: Wed Jun 15, 2016 5:08 pm 
Offline
Comrade
User avatar

Joined: Thu Dec 27, 2012 6:10 pm
Posts: 416
Has thanked: 26 time
Have thanks: 31 time
Come to think of it, the answer is obvious: to earn interest on the reserves they can't profitably loan out. It's the reason at present why private banks park their reserves at the central bank (Federal Reserve).


Report this post
Top
 Profile  
 
 Post subject: Re: a bank depositing its money at another bank?
PostPosted: Wed Dec 07, 2016 1:29 am 
Offline
Comrade
User avatar

Joined: Thu Dec 27, 2012 6:10 pm
Posts: 416
Has thanked: 26 time
Have thanks: 31 time
On another thread I mentioned that the total volume of US inter-bank payments amounts to about $3 trillion a day (Fedwire). Fedwire doesn't net transactions.

That's something done by CHIPS. CHIPS processes $1.5 trillion transactions a day. CHIPS itself is a major component of Fedwire, so I assume the $1.5 is included in the 3 trillion. It's difficult to arrive at a calculation of the total payment after netting. CHIPS's netting engine is said to reduce $1.5 trillion to $85 billion. The participant banks thus have to pre-fund, ie put up front in "cash" each day only this $85 billion. https://www.theclearinghouse.org/paymen ... w-it-works

That's a realistic figure. If we compare with netting of the foreign exchange transactions through the CLS bank, which daily processes about $5 trillion (in over 17 currencies), reducing the netted total transactions to under 2% ($100 billion).

We still are left with the other $1.5 trillion of transactions in Fedwire though. Speaking prior to QE, when bank deposits at the the Federal Reserve were just a dozen billion, I think this 1.5 trillion would be too big for banks to pay each other via central bank borrowing ("repos"). After all, banks in other countries (eg UK) do not have to even hold any overnight deposits at their central bank. There must be still some other way of netting. In the UK the daily transaction volume via CHAPS is GBP 270 billion. Do we really believe that financial institutions borrow such a great amount from their central bank each day?

Still, if we assume that the actual netted transaction volume in the US is at most say $170 billion in total a day, that would still be a big amount, to cover solely via repos.


Report this post
Top
 Profile  
 
 Post subject: Re: a bank depositing its money at another bank?
PostPosted: Wed Dec 07, 2016 3:38 am 
Offline
Comrade
User avatar

Joined: Thu Dec 27, 2012 6:10 pm
Posts: 416
Has thanked: 26 time
Have thanks: 31 time
Looks like I was wrong to include CHIPS transactions into Fedwire transactions.

The whole $3 trillion daily Fedwire transactions are indeed funded by central bank borrowing. And it does not have to be via repos (discount window), which does however have a sizeable daily volume. Last year the Fed dropped its cap of $300 billion https://www.bloomberg.com/news/articles ... over-rates

Rather it occurs via "intraday provision of settlement liquidity", to quote a phrase from Zhou (2000): Understanding intraday credit in large-value payment systems https://www.chicagofed.org/publications ... 0/3qepart3

It's called a daylight overdraft:
https://en.wikipedia.org/wiki/Daylight_overdraft

Quote:
Even though the PSR [Payment System Risk] policy does not require the explicit collateralization of most daylight overdrafts, a significant amount of the Reserve Banks’ intraday credit exposure is secured by collateral.

https://www.federalreserve.gov/payments ... ciples.pdf

Other study on the UK payment system:

The Timing and Funding of CHAPS Sterling Payments https://www.newyorkfed.org/medialibrary ... becher.pdf


Report this post
Top
 Profile  
 
 Post subject: Re: a bank depositing its money at another bank?
PostPosted: Wed Dec 07, 2016 12:06 pm 
Offline
Comrade
User avatar

Joined: Thu Dec 27, 2012 6:10 pm
Posts: 416
Has thanked: 26 time
Have thanks: 31 time
Quote:
Once daylight overdrafts are permitted on a gross settlement network, the distinction between a gross
and net settlement system begins to break down. Although Fedwire’s transfers are final when made while those on the other systems are not, sending banks incurring overdrafts on Fedwire are allowed to settle on a basis similar to that found on the private networks.
https://www.richmondfed.org/~/media/ric ... 710302.pdf

Quote:
Forbidding Fedwire overdrafts would be costly to the banking system and its customers because transfers would have to be held until covering funds were provided, thus depriving institutions of flexibility in making transfers. The results would be the intraday analogue of forbidding short-term credit by which businesses bridge gaps between payments and receipts.



Intraday overdrafts are a relatively small percentage, according to: Settlement Liquidity and Monetary Policy Implementation—Lessons from the Financial Crisis https://www.newyorkfed.org/medialibrary ... ol18n1.pdf

Quote:
peak daylight overdrafts have been remarkably stable, at around 5 percent of total payment value


So I'm still a bit in the dark about the source of funding of the majority of transactions (could be liquidity recycling, and just the plain reserve balances).

Furthermore, the measures taken after the 2007-8 crisis dramatically decreased the absolute volume of intraday overdrafts in the US (see chart on pdf page 13 of this study).


Report this post
Top
 Profile  
 
 Post subject: Re: a bank depositing its money at another bank?
PostPosted: Fri Dec 09, 2016 3:31 pm 
Offline
Comrade
User avatar

Joined: Thu Dec 27, 2012 6:10 pm
Posts: 416
Has thanked: 26 time
Have thanks: 31 time
Over on libcom (http://libcom.org/forums/theory/fallaci ... ent-588742) I asked the question: why don't commercial banks with deposits at the ECB, losing money due to the negative deposit rate, move their deposits to their branches abroad, eg the UK, to avoid the negative rate?

I quoted figures of the amount of euros held in the UK. But now I think I was perhaps mistaken. Those "UK euros" must actually also be held on the ECB accounts, or since I can't directly find the statistics, perhaps on accounts of the national central banks of the euro area. How does it work concretely? I don't know yet...

The Federal Reserve does publish the figure of dollar deposits that foreign central banks hold with it (in New York). See "Foreign official deposits" https://www.federalreserve.gov/monetary ... lities.htm

And when the Fed lends dollars to foreign central banks, this is not send electronically to a computer abroad (as I naively imagined), but is deposited at that foreign central bank's account at the Fed (though actual cash notes can be send abroad if necessary):

Quote:
The New York Fed provides limited investment services to its foreign official and international account holders. Principal among these is the foreign repurchase agreement pool (foreign repo pool).

https://www.newyorkfed.org/aboutthefed/fedpoint/fed20

Btw, a chart of how at the center of the entire USD payments infrastructure is Fedwire, on page 14: https://www.newyorkfed.org/medialibrary ... 120329.pdf

Am I right that deposit money can never actually leave the country?


Report this post
Top
 Profile  
 
 Post subject: Re: a bank depositing its money at another bank?
PostPosted: Fri Dec 09, 2016 4:00 pm 
Offline
Comrade
User avatar

Joined: Thu Dec 27, 2012 6:10 pm
Posts: 416
Has thanked: 26 time
Have thanks: 31 time
The chart shows that some "settlement banks" have direct access to Fedwire. I think one of them is called the Euroclear Bank.
http://bankinfos.org/fedwire_participants/show/240

The Fedwire Participant Directory is unavailable to the public, but it is said that there are over 9000 participants. I don't think most regular foreign (non-US) commercial banks have access to Fedwire.

I think final payments with foreign dollars still somehow must ultimately go through Fedwire, and that requires having access to Fedwire.


If you don't have access to Fedwire, you don't have means of payment, you have no money.

How does a European bank with dollars "in Europe" make eg a payment with them to another European bank?

I don't see much possibilities. I can imagine only two and they don't make much sense:

Either it must have a bank branch in the US with access to Fedwire (but then why in the first place do we consider that the dollars are held outside the US).

Or it has a dollar account at its own European central bank which has access to Fedwire and acts as agent for the dollar operations of its domestic commercial banks (sounds again very strange).


Report this post
Top
 Profile  
 
 Post subject: Re: a bank depositing its money at another bank?
PostPosted: Sat Dec 10, 2016 3:53 am 
Offline
Comrade
User avatar

Joined: Thu Dec 27, 2012 6:10 pm
Posts: 416
Has thanked: 26 time
Have thanks: 31 time
Quote:
The Fedwire Funds Service is used for [...] the settlement of cross-border U.S. dollar commercial transactions...

https://www.newyorkfed.org/aboutthefed/ ... fed43.html

Quote:
The laws of non-U.S. jurisdictions are not directly applicable in disputes involving direct Fedwire Funds Service participants because all direct Fedwire Funds Service participants are required by the Reserve Banks to be chartered or licensed in the United States. Foreign banking organizations are only permitted to access the Fedwire Funds Service through branches, agencies, or affiliates established in the United States. In case of insolvency, U.S. jurisdictions employ a territorial or “separate entity” liquidation scheme, in which a foreign bank’s U.S. offices are liquidated in a proceeding under U.S. law separate from the liquidation of the foreign bank in its home country.

https://www.federalreserve.gov/payments ... ciples.pdf

Quote:
foreign banks remain the single biggest beneficiary of the Fed's generous excess reserve policy, with some $1.1 trillion in reserves - more than either large or small domestic commercial banks - parked at the Fed belonging to foreign commercial banks: these reserves now collect a rate of 0.50% per year, a rate which is set to rise with every incremental rate hike.

http://www.zerohedge.com/news/2016-02-2 ... parked-fed

Quote:
There is an interest-rate incentive for foreign central banks to take deposits from commercial banks and park those moneys in the foreign customer pool at the Fed

Use of Fed’s Foreign Repo Program Grows, WSJ 21 February 2016
http://www.wsj.com/articles/use-of-feds ... 1456081097

Though it is mainly just the Japanese central bank which increased its "cash" dollar deposit (by selling its US Treasurys).
https://concentratedambiguity.wordpress ... #more-2202

Apparently the foreign repo pool has existed since the 1970s.

--
Given the importance of Fedwire, cybersecurity is vital. http://foreignpolicy.com/2014/04/29/exc ... r-attacks/

By the way:

Quote:
The NIRT also protects Federal Reserve research networks, which economists use to make financial forecasts and conduct research on policy issues on behalf of the Board of Governors and the powerful Open Market Committee, which makes decisions about interest rates and the growth of the U.S. money supply. The same former NIRT employee said that some of the research is so sensitive it’s conducted only on networks that have no connection to the Internet, so that criminals or foreign spies can’t access information that might help them discern the direction of U.S. policy.


Report this post
Top
 Profile  
 
 Post subject: Re: a bank depositing its money at another bank?
PostPosted: Sun Dec 11, 2016 12:17 pm 
Offline
Comrade
User avatar

Joined: Thu Dec 27, 2012 6:10 pm
Posts: 416
Has thanked: 26 time
Have thanks: 31 time
Okay, so this article argues that indeed the biggest funding source in the British payment system is liquidity recycling (even despite the increase of reserves due to QE): https://bankunderground.co.uk/2016/05/1 ... -payments/

And that indeed also seems to have been the case in the US prior to QE. But there indeed (like I understood) the increased excess reserve did seems to have changed the funding source for Fedwire transactions.
http://libertystreeteconomics.newyorkfe ... zLb7XJf2Ul


Report this post
Top
 Profile  
 
 Post subject: Re: a bank depositing its money at another bank?
PostPosted: Sun Mar 05, 2017 2:34 pm 
Offline
Comrade
User avatar

Joined: Thu Dec 27, 2012 6:10 pm
Posts: 416
Has thanked: 26 time
Have thanks: 31 time
I found just some random poster (from March 2013), making much the same point, as I tried to do in the comments above.

Quote:
High excess reserve balances will be the norm heading forward for three reasons:
1) High Excess Reserve Balances Reduce Delays in the Payment System (evidence supports this and it has been measured since Oct 9, 2008)
2) Increased reserve balances resulted in dramatic reductions in the demand for daylight credit provided by the Federal Reserve. This reduces the risk exposure of Federal Reserve Banks and the deposit insurance fund to a bank failure.
3) By paying interest on reserves, maintaining these balances is made less expensive for banks, as they suffer little or no opportunity costs by holding reserves overnight and throughout the day.
The Fed believes high excess reserves create a more efficient payment system and provides them more control over the interest rate.
The IoER policy implemented in 2008 also moved the Federal Reserve out of a “corridor system” and into a “floor system”. Under a floor system the level of reserves and the overnight interest rate are divorced. The IoER or “floor level” also becomes the deposit level. This disconnect works as long as there are sufficient excess reserves within the system, which in the case of the US, there are adequate excess reserves.
It should also be noted that future increases in the overnight rate are simply announced with the lending and deposit rates changing in tandem. Traditional models of draining reserves via FOMO are no longer required. Reserves are not the dual of overnight interest rates. Thus, when the Fed would like to “tighten” policy it will not be required to reduce the size of it’s balance sheet as draining operations are no longer required to hit the overnight target.
The Fed likely has no intention of reducing the size of it’s balance unless it sees necessary for reasons outside of setting rates.

http://econbrowser.com/archives/2013/03/whats_going_to


Report this post
Top
 Profile  
 
Display posts from previous:  Sort by  
Post new topic Reply to topic  [ 11 posts ]  Go to page 1, 2  Next

All times are UTC - 6 hours [ DST ]


Who is online

Users browsing this forum: No registered users and 2 guests


You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot post attachments in this forum

Search for:
Jump to:  
Donate Now
Donate Now



Hosted by © 2017 FreeForums.org | Create a free forum | Powered by phpBB
About FreeForums | Legal | Advertise Here | Investors | Contact FreeForums.org
Report Violation

Design By Poker Bandits  

suspicion-preferred