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The parent commenter is right, and the problem is the mark-to-market rule. This means that the value of the asset must be the current trading value, which goes
by coliveira 4y ago
The parent commenter is right, and the problem is the mark-to-market rule. This means that the value of the asset must be the current trading value, which goes down as the rates go up. The result is that bank reserves will go down substantially in nominal terms, sometimes faster than they can recoup the value of these investments.
- Retric 4y agoThat’s a regulatory rule which can be suspended not the underlying economic reality. “On April 9, 2009, FASB issued an official update to FAS 157[35] that eases the mark-to-market rules when the market is unsteady or inactive.” https://en.wikipedia.org/wiki/Mark-to-market_accounting https://en.wikipedia.org/wiki/Mark-to-market_accounting We’re currently in some interesting times: “As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.“. https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- coliveira 4y agoThe key phrase here is "when the market is unsteady or inactive". Apparently this can be used to save banks, but not until there is trouble in the market.