Pondering the Collapse of the Entire Shadow Banking System
What’s behind the ever-increasing need for emergency repos? A couple of correspondents have an eye on shadow banking.
Shadow Banking
- The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking.
- It is generally unregulated and not subject to the same kinds of risk, liquidity, and capital restrictions as traditional banks are.
- The shadow banking system played a major role in the expansion of housing credit in the run up to the 2008 financial crisis, but has grown in size and largely escaped government oversight since then.
The above from Investopedia.
Hey It’s Not QE, Not Even Monetary
Yesterday, I commented Fed to Increase Emergency Repos to $120 Billion, But Hey, It’s Not Monetary.
Let’s recap before reviewing excellent comments from a couple of valued sources.
The Fed keeps increasing the size and duration of “overnight” funding. It’s now up $120 billion a day, every day, extended for weeks. That is on top of new additions.
Three Fed Statements
- Emergency repos were needed for “end-of-quarter funding“.
- Balance sheet expansion is “not QE“. Rather, it’s “organic growth“.
- This is “not monetary policy“.
Three Mish Comments
- Hmm. A quick check of my calendar says the quarter ended on September 30 and today is October 23.
- Hmm. Historically “organic” growth was about $2 to $3 billion.
- Hmm. Somehow it takes an emergency (but let’s no longer call it that), $120 billion “at least” in repetitive “overnight” repos to control interest rates, but that does not constitute “monetary policy”
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