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Central Bankers Reject Collateral Shortage Warnings

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Financial industry warnings of a looming shortage in collateral due to tougher trading and banking rules are unfounded, a committee of central bankers concluded in a report on Monday.

The demand for collateral like high quality government bonds to back derivatives transactions has risen sharply due to reforms to make derivatives trading safer.

Banks no longer trust each other with unsecured funding and demand collateral, which has push up demand for it along with new rules forcing banks to build up buffers of cash to withstand a run.

Another crisis around the corner then.

High quality govt debt bonds you can't beat them can you..... Obviously providing the govt honours them and doesn't try and cheat and inflate the value away or just openly default...

There's value in paper.

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Perhaps a partial explanation for the fact that central bankers are continuing to throw money at stock markets around the world?


Central bankers are planning on continuing to boost equity exposure via exchange traded funds. The Bank of Japan, among many others, plans to double exposure to stock ETFs over the course of the year, as falling bond yields disappoint.

Central bankers around the world have been putting direct investments into equity markets. This accounts for about $11 trillion in foreign exchange reserves, reports ETF Guide. A survey taken last month of 60 central bankers revealed that about 23% of them expect to raise their level of stock exposure, according to the Royal Bank of Scotland Group. [Global Equity ETF Technical Outlook]

For example, The Bank of Japan, second-largest holder of reserves, plans on doubling investment into the iShares MSCI Japan ETF (EWJ) to 3.5 trillion yen, equal to $35.2 billion, by 2014. In addition to the exchange traded fund purchase, the BOJ will also buy Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of about 1 trillion yen and about 30 billion yen respectively. [Japan ETF Rally Still Alive as Yen Weakens]

Other central bankers that are hot on equities include the Bank of Israel, Czech National Bank and Swiss National Bank. All three have already raised equity exposure to about 10% of reserves so far. [Treasury, Dollar ETFs in Focus on Bernanke]

“In the last year or so, I have spoken with 103 central banks on diversification,” Gary Smith, London-based global head of official institutions at BNP Paribas Investment Partners, said onBloomberg. “If reserves are growing, so are diversification pressures. Equities are not for every bank tomorrow, but more are continuing down this path.”

Bank asset managers are seeking alternatives to government bonds as the numerous rounds of monetary easing by the Federal Reserve, Bank of Japan and Bank of England have sent yields to all-time lows. The low bond returns have signaled more than half of the central bankers surveyed to take on more risk in the equities markets.

“Equities are the last asset class standing,” Matthew Beesley said in a Bloomberg interview. “When you have dividend yields in excess of bond yields, it’s a very logical move.”

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The shadow banking system uses rehypothecation like some kind of ersatz fractional reserve system- and it exhibits the same kinds of fragility- it's based on confidence. But how much confidence can you have in collateral that may have been pledged multiple times to god knows who?

What I love about bankers is they have discovered the perfect form of financial terrorism- their own utter incompetence.

The clever part being that any attempt to impose controls or limits on their activities will expose the underlying fragility and so result in disaster.

So we end up in the absurd position that any attempt to make the financial system safer is likely to bring about it's collapse via some quantum like effect in which the mere act of exposing it to scrutiny will destroy all confidence in it's sustainability. :lol:

It's as if an Architect had built a structure so unsafe that any attempt to prevent it's collapse will cause it to fall over- so the choice is between causing it to collapse today- or waiting for it to collapse in the future.

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  • 239 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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