Third, the banking sector has, post 2008, needed government bonds as a mechanism to secure overnight deposits.

Not my specialty, but I thought they plonked reserves overnight with the Bank of England now. Is this Ritchie still getting the Repo market wrong?

5 thoughts on “Rilly”

  1. Don’t know whether they still do, but the really interesting thing is the paucity of Murphy’s imagination. This is what is done (or was done last time Murphy checked), therefore this is what has to be done.

    It’s the same as his insistence that money has to be issued by a tax-collecting government. It is done like that currently, so there is no alternative.

  2. Before the crisis some institutions would deposit gilts (“government bonds” to an Irish accountant) as security for an overnight cash deposit because it was cheaper to p[ay one night’s interest than to sell the gilt for cash (also if you sold the gilt you wouldn’t get the cash until the next day which was too late)
    I fail to understand why Murphy thinks the practice originated in 2008.
    The LIBOR scandal is all about Barclays lying about the rate it would need to pay on *unsecured* overnight cash borrowings post-crash. That demonstrates that banks did not need gilts to secure overnight deposits – in fact the existence of LIBOR does so.

  3. He’s not wrong but not right in suggesting the market needs more gilts and using that as an excuse for the state to borrow.

    Overnight repo is overnight and gilts are used as collateral to make it risk free. Central bank reserves are cash deposits at the central bank, pretty bloody clear. Term repo, clearly for longer periods, uses gilts as well.

    There was a repo crisis in ‘15 where rates were negative, you had to pay people to take your cash. (As repo is the lending of gilts or something else, in exchange for cash so a negative rate means the lender is getting paid). The causes for this are complex and related to regulation, the leverage ratio, and a shortage of lendable gilts at the time. This has eased now and rates are positive.

    Of note is the quarter and year end moves in rates. The bank levy is based on cash held, quite reasonably, but at year end, which makes getting rid of cash for the date of record quite an important idea. This led to repo rates being negative at YE16. Look up the repo rates for bunds at ye16 if you fancy knowing how negative things can go in percentage points rather than basis points. People were better prepared for ye17.

    Repo also allows monetisation of assets. It’s a lubricant in the financial system. More gilts makes repo easier but as a colleague put it, it’s not the only necessary condition. Those other conditions are probably biting right now and for the foreseeable future.

  4. There’s something rather important about Spud’s misunderstanding. If there really is a gilts shortage then the BoE should sell some of the gilts it holds. That is reverse QE. The very thing he insists should and must never happen.

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