46.1 Interbank Netting: The Pressure to Get to Zero
Private banks fund global economic activity. But how do they move money among themselves? We consider the November 20, 1985 software glitch that shocked the interbank market. Then, a brief history of Fedwire, Telex, SWIFT and CHIPS. Finally, September 2019’s repo market freeze.
[Emil’s Summary] Having studied monetary policy for several years it was only natural that your podcaster spent considerable time contemplating the essential elements of fiction. Some experts say there are five components to it; others put the tally at six, even eight! But at the core it has always been the three elements: plot, setting and character.
Plot was perfected, in the Western tradition at least, in the late 16th century by Shakespeare with the 5-act dramatic structure. Setting, given short-shrift for millennia, did not achieve co-equal status until the gothic novels of the mid-18th century. And character? Scholars point back 28 centuries to The Iliad: heroism, cowardice, pride, hubris – wrath. But the scholars are wrong. Character wasn’t perfected first, but last. Not until the 1980s action drama The A-Team did this element of fiction reach its zenith.
The American television masterpiece synthesized what the Great Books dared not imagine into the now classic quartet: Colonel John “Hannibal” Smith as the brains; Lieutenant Templeton “Faceman” Peck as the looks; Sergeant Bosco Baracus the muscle; Captain H.M. Murdock the wildcard. The casting blueprint can be observed most everywhere; in the arts, at the office; even family the dinner table. Central banking is no exception. In the role of the brains is Ben “Hannibal” Bernanke. The looks? Lady Lagarde. The muscle? Jay “Mad Dog” Powell. The wildcard? The audience will naturally point to Haruhiko Kuroda and, before January 28th, the audience would have been correct.
On that day Isabel Schnabel, Member of the Executive Board of the European Central Bank, gave a speech extolling the virtues of the sovereign-bank-corporate nexus. That is technocrat-speak for the government-guaranteed private-bank loans to private enterprise. Schnabel endorsed these “crucial” national loan schemes and encouraged Europe’s capitals to continue them, warning any premature end would be “destabilising”. Put another way, the baton that represents the supervision of money creation, has been wrested away from Frankfurt and placed into the neatly manicured hands of politicians, seeking re-election.
The new wildcard is not Isabel Schnabel but the Euro Area member state. All 19 of them.
In this episode we touch upon 1980s television shows, like CHiPs and interbank clearing mechanisms, like CHIPS. Also, why are corporate elephants on the hunt for fast-moving gazelle enterprises? Why are these elephants being offered their own fiefdoms in Nevada? Lastly, a potpourri review of Jeff Snider’s recent writing.
———WHO———
Twitter: https://twitter.com/
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Art: https://davidparkins.com/
Jeff Snider, Head of Global Investment Research for Alhambra Investments with Emil “Stringfellow” Kalinowski. Art by David Parkins. Podcast intro/outro is “City Lights, City Dreams” by Forever Sunset at Epidemic Sound.
———WHERE———
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———WHEN———
00:05 What is the Clearing House Interbank Payment System?
02:05 On November 20, 1985 the Bank of New York experienced a 30,000-trade, $20-billion pile up
09:39 FRBNY President Corrigan testified that the BONY problem spooked the interbank network
10:26 A brief history of Fedwire, Telex, SWIFT and CHIPS.
17:10 How does CHIPS function? How do banks manage intraday exposures to negative externalities?
21:56 How can a bank obtain cash to settle up at the end of a CHIPS day? There are three ways.
27:38 Who’s at risk of daylight overdraft with all the “excess reserves”? Non-Dealer Banks.
30:10 The September 2019 repo market freeze may have been a reaction to intraday overdrafts.
33:28 Banks lack confidence in their central banks to competently backstop the system
35:11 Central banks tell the public this is “easy button” stuff – but CHIPS shows its not
———WHAT———
There’s Much More Going On Than You’ve Been Led to Believe: https://bit.ly/
Alhambra Investments Blog: https://bit.ly/2VIC2wW
RealClear Markets Essays: https://bit.ly/38tL5a7
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