Is Repo Lending Inherently Unstable?
By Arnold Kling
The blogger at Synthetic Assets (Carolyn Sissoko, I assume) writes,
Liquid assets are supposedly “safe” – but for the problem that liquidity itself is inherently ephemeral. How precisely do the regulators imagine that collateral posted by a systemically important financial institution (SIFI) is going to protect the lenders? If the SIFI goes down, there is, in the absence of central bank intervention, a fire sale. And if they’re counting on central bank intervention to make it possible for collateral to function to protect the borrowers from losses (e.g. via a PDCF or TSLF), why not just rely on traditional central bank lending to banks in a crisis?
If this criticism is valid, as I believe it is, then the whole structure of our financial system is wrong.