Collateral damage August 16, 2012 at 6:30 am
Four telling graphs, from a great presentation by Citi’s Matt King (HT FT Alphaville).
First, the importance of the repo market:
Second, the growing importance of collateralized borrowing (and the decline of the interbank market):
Third, the trend towards the use of ‘safe’ collateral:
Fourth, where the bad stuff ends up:
So… what do we have? It’s hard for a bank to borrow unsecured. It’s hard for it to borrow secured in the private market unless they have the best collateral. But, riding to the rescue (kinda), is the ECB, where you can pledge some of that dodgy collateral. This state of affairs is not sustainable in the long term, though; we need to do something to get banks to trust each other again.