Tapering, the exit path, and collateral September 21, 2013 at 10:10 am
Peter Stella has an excellent post on VoxEU on the implications of the central bank exit strategy for collateral. What’s nice about this in particular is that Stella understands modern credit creation:
Most credit in the US is created by nonbanks; virtually all bank lending is funded by the creation of liabilities that are not subject to reserve requirements, and central banks do not ration reserves. In fact they take great pains to provide banks with the amount of reserves they desire. Central banks influence credit not by rationing the quantity of reserves but by altering the interest rate that banks must pay to obtain the quantity of reserves they desire.
Stella then points out that the precise exit mechanism chosen from QE has considerable implications for collateral: in particular “reverse-repo has a portfolio effect that [the offer to banks of] term deposits do not”. Indeedy.