The interbank lending system revolves around the assessment and perception of risk between banks. At its core, over-the-counter (OTC) interbank lending involves the exchange of liquidity for collateral. Banks evaluate the value and risk associated with the collateral being offered and make adjustments accordingly. In return, the borrowing bank offers an interest rate based on their perception of the collateral's value.
This system holds significant importance because if the Treasury provides an unlimited supply of AT1 Treasuries, where the value and risk are clearly defined, banks can avoid exposing the other elements of their portfolios where the risk is high and potential losses have not yet been fully realized on their balance sheets.
By relying on these well-defined and low-risk Treasury bonds as collateral, banks can mitigate risk and maintain stability in their lending activities. This provides a level of certainty and confidence in the interbank lending system, enabling smooth operations and facilitating the flow of liquidity in the financial markets.
Furthermore, the availability of high-quality Treasury collateral positively influences market dynamics. The presence of central bank eligibility for specific securities can increase their price and reduce their yields, especially during periods of collateral scarcity. Consequently, well-managed collateral policies by central banks can have positive effects on wider market practices, contributing to improved market functioning overall.
In summary, the use of Treasury bonds as collateral in the interbank lending system ensures the allocation of well-defined and low-risk assets, allowing banks to manage potential losses effectively. This approach not only supports stability within the banking sector but also enhances market functioning, benefiting the wider financial system.
Alfonso, I like your articles a lot, insightful and accessible. Your article on China, two thoughts and would appreciate your take on it: 1) Very few households on China are highly leveraged, most bought the property with their savings; to which extent does this weaken your parallel with Japan? 2) If China does fiscal stimulus, agree on the impact, but would we then lament that this is all unsustainable and must go wrong (bc China has no USD as world reserve currency)? Just to be clear, I agree with your basic point that narratives dominate prices for a long time and its hard to identify the turning points. Thanks for your thoughts. Alexander
The interbank lending system revolves around the assessment and perception of risk between banks. At its core, over-the-counter (OTC) interbank lending involves the exchange of liquidity for collateral. Banks evaluate the value and risk associated with the collateral being offered and make adjustments accordingly. In return, the borrowing bank offers an interest rate based on their perception of the collateral's value.
This system holds significant importance because if the Treasury provides an unlimited supply of AT1 Treasuries, where the value and risk are clearly defined, banks can avoid exposing the other elements of their portfolios where the risk is high and potential losses have not yet been fully realized on their balance sheets.
By relying on these well-defined and low-risk Treasury bonds as collateral, banks can mitigate risk and maintain stability in their lending activities. This provides a level of certainty and confidence in the interbank lending system, enabling smooth operations and facilitating the flow of liquidity in the financial markets.
Furthermore, the availability of high-quality Treasury collateral positively influences market dynamics. The presence of central bank eligibility for specific securities can increase their price and reduce their yields, especially during periods of collateral scarcity. Consequently, well-managed collateral policies by central banks can have positive effects on wider market practices, contributing to improved market functioning overall.
In summary, the use of Treasury bonds as collateral in the interbank lending system ensures the allocation of well-defined and low-risk assets, allowing banks to manage potential losses effectively. This approach not only supports stability within the banking sector but also enhances market functioning, benefiting the wider financial system.
keep the good work!
Alfonso, I like your articles a lot, insightful and accessible. Your article on China, two thoughts and would appreciate your take on it: 1) Very few households on China are highly leveraged, most bought the property with their savings; to which extent does this weaken your parallel with Japan? 2) If China does fiscal stimulus, agree on the impact, but would we then lament that this is all unsustainable and must go wrong (bc China has no USD as world reserve currency)? Just to be clear, I agree with your basic point that narratives dominate prices for a long time and its hard to identify the turning points. Thanks for your thoughts. Alexander
Many thanks for your insightful point of view.
Please let me share this analysis which compares the dotcom bubble and AI.
https://themarketjourney.substack.com/p/this-time-is-different
Bravo Alfonso!
Spero di poterti contattare presto per far parte del tuo gruppo privato ;)
Buon lavoro!
NVIDIA has been in net sell for three quarters, the majority of its gains have been while it’s been wildly sold.