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Something I've always wondered about overnight lending. All the money is basically repayable at one point in time, the start of business in the morning. What ha
by benj111 7y ago
Something I've always wondered about overnight lending. All the money is basically repayable at one point in time, the start of business in the morning. What happens if theres a problem? What happens if a banks systems crash and that money can't be repaid, presumably having knock on impacts on the next days overnight lending.
I'm not suggesting it would be an end of days scenario, just curious.
- viburnum 7y agoFailing a rescue from a central bank, you could have a bank run. I still don’t know why the ordinary payments system has to be coupled with hedge funds and derivatives and whatnot. It should be completely separate. It’s like having your car explode because a cup holder got a crack.
- benj111 7y agoSo it could be as bad as that? It's kind of why I asked the question, but I thought there would be a rule or process or something. It's 'nice' how occasionally you get a glimpse at the gaffer tape and baling twine holding the world together.
- cm2187 7y agoBut that's what central banks are there for, to provide emergency liquidity to regulated banks in order to support the stability of the financial system. Also do consider that most contracts include grace periods for technical glitches. But the first line of defense is the enormous amount of cash and liquid assets banks are required to hold to ensure they remain liquid.
- coliveira 7y agoThe system is coupled with hedge funds and etc. because the money they use come from banks. Goldman Sachs and others don't have the money to maintain all their obligations, it all comes from other banks that loan the required funds. When there are problems in money part of the banking system, everything goes down.
- viburnum 7y agoYeah, that’s the problem. They should be separated.
- camjohnson26 7y agoUnless I’m mistaken, Lehman Brothers and Bear Stearns went under because they were facing that exact scenario.
- whatok 7y agoOne of the problems is intraday liquidity. Long story short, financial regulations and Treasury supply have forced banks into holding securities that are unable to provide intraday liquidity. It's very hard to have a repo spike like this when excess reserves are actually plentiful.
- woah 7y agoI assume some bank employees just have to spend more time on the phone than they were planning to that morning to fix the problem manually.