One of the big problems during the financial crisis was a bank run in the shadow banking system when doubts emerged about the safety of deposits.
In my last column at the Fiscal Times, I talked about an approach to solving the problem that involves having deposits in the shadow system backed (insured) by high quality collateral.
But high quality collateral is not the only option. Another way to do this is through a type of insurance along the lines of what the FDIC does for the traditional banking system, along with restrictions on eligibility for the insurance. In reaction to my column, and in support of the insurance approach, Morgan Ricks of Harvard Law School emails:
I enjoyed your Fiscal Times piece and am glad you're focused on this issue.
I'm a big admirer of Gary and Andrew's work, but I would encourage you to give some more thought to whether collateral requirements for repo are likely to do the trick. Here are a few things to consider:
- Many of the short-term liabilities of the shadow banking system were and are uncollateralized (think about Lehman's reliance on unsecured commercial paper -- the default of which caused the Reserve Fund to "break the buck," igniting the run on money market funds; and Citigroup's SIVs, which financed themselves in the unsecured markets).
- Money market investors do not want to take possession of collateral and dispose of it. Even if the collateral is high quality, they don't want the interest rate risk. That's not their business. They don't want to deal with the consequences of a counterparty default. This is why, in the crisis, many money market investors stopped rolling even those repos that were fully secured by Treasuries and agencies:
- See Chris Cox's testimony on Bear Stearns (here http://www.sec.gov/news/testimony/2008/ts040308cc.htm): "For the first time, a major investment bank that was well-capitalized and apparently fully liquid experienced a crisis of confidence that denied it not only unsecured financing, but short-term secured financing, even when the collateral consisted of agency securities with a market value in excess of the funds to be borrowed"
- See also FRBNY's repo task force report (here http://www.newyorkfed.org/prc/report_100517.pdf): “Discussions in the Task Force emphasized repeatedly that many Cash Investors focus primarily if not almost exclusively on counterparty concerns and that they will withdraw secured funding on the same or very similar timeframes as they would withdraw unsecured funding.”
- Even if collateral requirements reduce the likelihood of runs, how do we calibrate them -- what is the objective function? Presumably we think maturity transformation (fractional reserve banking) is a good thing -- it increases the supply of loanable funds by pooling otherwise idle cash reserves and deploying them toward productive investments. Risk constraints (such as collateral requirements) necessarily reduce this surplus -- there is a real social cost. How do we appraise the corresponding benefit? That is, how do we estimate the systemic instability associated with any given level of collateral requirements? My argument is that we can't. And by "we" I mean not just the government, but anybody.
My paper argues that we avoid these problems with an insurance regime; that financial firms outside the insurance regime should be disallowed from conducting maturity transformation (i.e., they would have to rely on term funding, not money market funding); and that we should develop functional criteria of eligibility for the insurance regime. (By the way, this is not the same thing as "extending" insurance to shadow banks.)
Anyway, these are things worth thinking about. I think the insurance approach needs more serious consideration than it has received -- it's a little lonely over here ...
Best,
Morgan Ricks
See here for nice summary of this approach and link to the underlying academic paper.
It seems that one of Google’s latest doodles, a homage to the 25th anniversary of the discovery of Buckyballs was, as we suspected, too clever by half. Two, presumably, unintentional consequences have emerged: costing Google’s users money, while making a heck of a lot of cash for the maker of the Buckyballs desktoy overnight.
The way the doodle itself had been designed put a very heavy load on users’ computers, increasing power consumption at a cost to those users, as well as causing many a browser crash. That’s kind of clumsy and, arguably, irresponsible when you consider how many people have Google as their browser’s default start page.
But more bizarrely was another side effect, which surely Google must have anticipated: sending a massive amount of traffic to GetBuckyballs.com, a site that sells the Buckyballs desktoy, described as “a set of building spheres containing 216 powerful Rare Earth magnets that can be shaped, molded, torn apart and snapped together in unlimited ways.”
That’s because clicking on Google’s doodle brought up search results for “Buckyballs”, and GetBuckyballs.com was one of the top results, sending over 2,000,000+ unique visitors to the site and generating 10,000 unit sales in a single day. Which translates to more than $250,000 in revenue, at least according to the announcement the online retailer distributed today.
That’s one way of making your search engine positioning efforts pay off – but it’s certainly a rare occasion to see Google lending such a big virtual hand.
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eric seiger eric seiger
One of the big problems during the financial crisis was a bank run in the shadow banking system when doubts emerged about the safety of deposits.
In my last column at the Fiscal Times, I talked about an approach to solving the problem that involves having deposits in the shadow system backed (insured) by high quality collateral.
But high quality collateral is not the only option. Another way to do this is through a type of insurance along the lines of what the FDIC does for the traditional banking system, along with restrictions on eligibility for the insurance. In reaction to my column, and in support of the insurance approach, Morgan Ricks of Harvard Law School emails:
I enjoyed your Fiscal Times piece and am glad you're focused on this issue.
I'm a big admirer of Gary and Andrew's work, but I would encourage you to give some more thought to whether collateral requirements for repo are likely to do the trick. Here are a few things to consider:
- Many of the short-term liabilities of the shadow banking system were and are uncollateralized (think about Lehman's reliance on unsecured commercial paper -- the default of which caused the Reserve Fund to "break the buck," igniting the run on money market funds; and Citigroup's SIVs, which financed themselves in the unsecured markets).
- Money market investors do not want to take possession of collateral and dispose of it. Even if the collateral is high quality, they don't want the interest rate risk. That's not their business. They don't want to deal with the consequences of a counterparty default. This is why, in the crisis, many money market investors stopped rolling even those repos that were fully secured by Treasuries and agencies:
- See Chris Cox's testimony on Bear Stearns (here http://www.sec.gov/news/testimony/2008/ts040308cc.htm): "For the first time, a major investment bank that was well-capitalized and apparently fully liquid experienced a crisis of confidence that denied it not only unsecured financing, but short-term secured financing, even when the collateral consisted of agency securities with a market value in excess of the funds to be borrowed"
- See also FRBNY's repo task force report (here http://www.newyorkfed.org/prc/report_100517.pdf): “Discussions in the Task Force emphasized repeatedly that many Cash Investors focus primarily if not almost exclusively on counterparty concerns and that they will withdraw secured funding on the same or very similar timeframes as they would withdraw unsecured funding.”
- Even if collateral requirements reduce the likelihood of runs, how do we calibrate them -- what is the objective function? Presumably we think maturity transformation (fractional reserve banking) is a good thing -- it increases the supply of loanable funds by pooling otherwise idle cash reserves and deploying them toward productive investments. Risk constraints (such as collateral requirements) necessarily reduce this surplus -- there is a real social cost. How do we appraise the corresponding benefit? That is, how do we estimate the systemic instability associated with any given level of collateral requirements? My argument is that we can't. And by "we" I mean not just the government, but anybody.
My paper argues that we avoid these problems with an insurance regime; that financial firms outside the insurance regime should be disallowed from conducting maturity transformation (i.e., they would have to rely on term funding, not money market funding); and that we should develop functional criteria of eligibility for the insurance regime. (By the way, this is not the same thing as "extending" insurance to shadow banks.)
Anyway, these are things worth thinking about. I think the insurance approach needs more serious consideration than it has received -- it's a little lonely over here ...
Best,
Morgan Ricks
See here for nice summary of this approach and link to the underlying academic paper.
It seems that one of Google’s latest doodles, a homage to the 25th anniversary of the discovery of Buckyballs was, as we suspected, too clever by half. Two, presumably, unintentional consequences have emerged: costing Google’s users money, while making a heck of a lot of cash for the maker of the Buckyballs desktoy overnight.
The way the doodle itself had been designed put a very heavy load on users’ computers, increasing power consumption at a cost to those users, as well as causing many a browser crash. That’s kind of clumsy and, arguably, irresponsible when you consider how many people have Google as their browser’s default start page.
But more bizarrely was another side effect, which surely Google must have anticipated: sending a massive amount of traffic to GetBuckyballs.com, a site that sells the Buckyballs desktoy, described as “a set of building spheres containing 216 powerful Rare Earth magnets that can be shaped, molded, torn apart and snapped together in unlimited ways.”
That’s because clicking on Google’s doodle brought up search results for “Buckyballs”, and GetBuckyballs.com was one of the top results, sending over 2,000,000+ unique visitors to the site and generating 10,000 unit sales in a single day. Which translates to more than $250,000 in revenue, at least according to the announcement the online retailer distributed today.
That’s one way of making your search engine positioning efforts pay off – but it’s certainly a rare occasion to see Google lending such a big virtual hand.
HMV: We're "very excited" about 3DS launch | <b>News</b>
HMV UK & Ireland CEO and MD, Simon Fox, has told GamesIndustry.biz that the retailer is.
Denver Broncos <b>News</b> - Horse Tracks - 10/4/10 - Mile High Report
Your daily Cup of Orange and Blue Coffee....Horse Tracks!
Probably Bad <b>News</b>: Breakfast Fail - Epic Fail Funny Videos and <b>...</b>
epic fail photos - Probably Bad News: Breakfast Fail.
eric seiger eric seiger
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