The FT reported earlier this week that the Fed is considering an overhaul of the $5-trillion a day repo market, which banks use to get short-term funding:
"People familiar with the Fed’s thinking say it is looking into the creation of a mechanism to replace the clearing banks – the biggest of which are JPMorgan Chase and Bank of New York Mellon – that serve as intermediaries between borrowers and lenders. ...
The clearing banks stand between the parties, providing services such as valuing the collateral and advancing cash during the hours when trades are being made and unwound. Fed officials fear this arrangement puts the clearing banks in a difficult position in a crisis. As the value of the securities falls, clearing banks have an obligation to demand more collateral to avoid losses. But in doing so, they could destabilise a rival."
Under consideration is a plan to create a utility-like clearing house possibly run by the government, an idea which makes a whole lot of sense. No doubt this is a further step away from "free-banking" (and there is at least one person who thinks that could work), but a pipeline as critical as the repo market should be under the purview of an institution like the Fed. As Alea points out, there are still signs that banks are fearful of lending or borrowing short-term, with commercial banks holding an excess of 10% of available collateral at the Fed.
In other central banking news, the ECB, which has held off going the American and Japanese route of 0% interest rates, auctioned off a whopping $621 billion in "stealth stimulus" today:
“It’s even more than our most optimistic scenario would have suggested,” said Christoph Rieger, a fixed income strategist at Commerzbank AG in Frankfurt. “There is so much liquidity around that it will push money-market rates to new record lows.”
But as in the U.S., it's unclear whether banks will increase their willingness to lend. For now, there's some reason to be hopeful: Germany's economy, expected to contract 6.2 percent this year, is inching towards a recovery.
--Zubin Jelveh