Collateral squeeze, the Fed DID it.
Total collateral pledged by borrowing depository institutions exceeded $1 trillion as of May 27, more than twice the amount of credit outstanding.
The Federal Reserve announced updates to collateral valuations in early April and implemented the updates at the end of April. These changes reduced the lendable value of collateral in aggregate by about 10 percent.
Most depository institutions that borrow from the Federal Reserve maintain collateral well in excess of their current borrowing levels
The impairment of credit is reducing the lendable value of the pledged assets, that’s one kind of squeeze but the real squeeze is that depository institutions are pledging a volume of assets far in excess of their (fed) funding needs, this indicates that these institutions aren’t confident of their continuing ability to fund in private markets.
The first table shows the problem: $965 billion of lendable collateral (after haircuts) backing $411 billion in fed funding. In a normal world the fed funding would equal the lendable value of the pledged collateral.
Isn’t it possible that it is the book value of assets which are not or scarcely tradable on the market, and so the impairment of credit through their colletalization is not really a squeeze?
(sorry if it is not clear, I am really not an expert)
Well, I have no data on this. The Fed did it to depositary institutions and maybe JPM did it to the non-depositary like bear stearens or lehman and the shadow bankers. Given the noise about reforming the repo market there is “something” there, but the Fed DID it by monopolizing excess collateral vs the funding they provided.
Wrong. JPM DID it.