Understatement of the week award July 20, 2012 at 6:05 am

From the FSOC annual report:

Currently, triparty repo trades unwind every day, meaning that the clearing bank returns cash to the lender’s account and returns collateral to the borrower’s account. Trades are not settled until several hours later. For several hours each afternoon, dealers require funding of their entire triparty repo book that lenders do not provide. This $1.7 trillion funding need is provided by two clearing banks.

This is a potentially unstable situation.

(Emphasis mine.)

4 Responses to “Understatement of the week award”

  1. Ya think?!?!

    Even more so now that the Fed’s ability to intervene has been constrained by Dodd-Frank. The first mover advantages in ceasing to provide intraday (BNYM andJPMC) or overnight (triparty investors) credit have been exacerbated. Make it much harder to “get to the weekend” and means earlier use of discount window by firms getting run.

  2. Carter

    Thank you.

    I have a question, which you may be able to answer. As I understand it, section 23a of the fed reserve act says that bank single obligator lending is limited to 10% of own funds. According to their 10-Q, BNY Mellon’s equity seems to be about $34B. (They have $17B of goodwill but let’s ignore that and be generous.) So their single obligator limit should be $3B, roughly, shouldn’t it? The act doesn’t say ‘end of day’, it says ‘exposure’ however construed, so how does BNY Mellon claim to be well capitalized given that it is clearly lending more than $3B to single obligators intra-day?

  3. [...] Reading this, it struck me how useful it would be to develop stress scenario training for central bankers. It would not be easy to design a simulator flexible enough to cope with a wide range of policy reactions, but it would be a great tool once you had it. You could have historical scenarios from the panic of 1825 through the Great Depression to Swedish and LTCM crises and imaginary ones like Euro breakup or the failure of a triparty repo clearer. [...]

  4. Presumably BNY Mellon and JPM will get hammered on their G-SIFI add-on for this? The epitomy of interconnectedness.

    Will be interesting to see how pricing in triparty repo evolves in light of this; you can see how the incentives work.