Monday, July 11, 2011

The World's Central Banker, Again

. Monday, July 11, 2011

Foreign banks are arbitraging the Fed:

Up until April this year, US banks had a nice little earner.

As Freakonomics explained, big banks were able to borrow cash from the Fed funds or repo market for say, 15 basis points, posting US Treasuries as collateral, and then deposit the cash received with the Federal Reserve overnight at 25bps, earning some 10bps. The FT has estimated that since late 2008, this risk-free arbitrage may have netted America’s banks as much as $200m in profits.

The arbitrage-opp came to an end in April, however, when the US Federal Deposit Insurance Corporation’s (FDIC) introduced a new fee on banks, essentially eliminating the 25bps-grab.

Small problem. It seems the new FDIC rules don’t apply to many non-American banks. And foreign banks, we should all know by know, also have access to the repo markets and federal funds.


Moreover, this is a good thing. The Eurocrisis may have been more destabilizing than it has been if foreign banks didn't have an easy way to recapitalize. And it doesn't hurt the US. Well, it hurts US banks, which don't have the same opportunity, but that provides an incentive for them to lend to the real economy, which is needed.

Also note this:

... the reported assets of US branches of foreign banks are up 250 per cent since the end of last year, now making up a whopping 48 per cent of their total assets. Basically, foreign banks have absorbed all of the growth in reserve balances in 2011.

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The World's Central Banker, Again
 
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