Coming Soon to an Economy Near You: Personal Checking Accounts at Your Central Bank
In addition, a number of participants noted that a relatively large ON RRP facility had the potential to expand the Federal Reserve’s role in financial intermediation and reshape the financial industry in ways that were difficult to anticipate.
Writing in the Financial Times, Tracy Alloway expands on this problem:
The Federal Reserve Bank of New York has emerged as the single largest player in an important segment of the short-term lending market that was at the epicentre of the financial crisis.The Fed’s decision to quadruple its trading with government money market funds in the repurchase or “repo market” is a sign that the central bank is now engaging more directly with the shadow banking system at the expense of large Wall Street banks… Armed with a balance sheet of $4.3tn of bonds purchased during quantitative easing, the Fed is using what it calls its reverse repo programme, or RRP, to trade with money funds at a time when tough new regulatory standards have made such borrowing less attractive for the banks. Rather than lending to the banks, money market funds have sharply boosted their dealings with the US central bank.[...]
Bill Dudley, New York Fed president, warned last month that if use of the repo facility were to grow too quickly it might “result in a large amount of disintermediation out of banks through money market funds and other financial intermediaries into the facility. This could encourage further enlargement of the shadow banking system.” Without a cap on use of repo with the Fed, investors who ordinarily lend to banks could instead flock to the central bank in times of market stress, exacerbating a flight from funding of banks, he warned.
What the Fed seems to be acknowledging is that if its reverse repo programme (RRP) proves too popular it could end up undermining the business of conventional deposit-taking banks. In other words, the Fed is prepping us for the idea that this is the route by which the central bank could become a universal banker… The thing to note, however, is the language and tone being used to communicate these ideas. The message is clearly that the Fed is mindful and fearful of becoming a universal banker and that this is not at all something that it wants.
Source: http://macromarketmusings.blogspot.com/2014/07/coming-soon-to-economy-near-you.html
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