by Wolf Richter, Wolf Street:
Back to the future: With repos, not QE, is how central banks handled issues before 2008. The Fed also revived tools to go back into that direction.
“The Bank of England is not alone in facing these choices. Central banks around the world are grappling with similar questions as crisis-era asset purchase programs and funding schemes are withdrawn,” Bank of England Governor Andrew Bailey said towards the end of his lecture at the London School of Economics this week, after he had laid out:
TRUTH LIVES on at https://sgtreport.tv/
- How much more the BOE’s balance sheet might drop (a lot more).
- How it would get there (including through outright sales of bonds).
- How the BOE would continue shedding bonds even after the balance sheet is low enough and stays level, until all bonds are essentially gone.
- How repos would then provide liquidity as-needed to the banks.
- And how this would change the composition of the balance sheet from long-dated bonds to short-term repos.
The BOE’s outline of a plan harkens back to how it was before the Financial Crisis – before QE showed up. With repos was in essence how the BOE, the Fed, and other central banks had handled liquidity issues and market disfunctions for decades until the Financial Crisis in 2008.
And the BOE is now the first major central bank discussing how it plans to revert to a similar system as before, draining reserves, then using repos – instead of bond purchases (QE) – to deal with issues.
In general, central bank repos are short-term instruments by which the central bank lends cash to approved counterparties (such as banks) against approved collateral (such as government bonds). They mature the next day, or in a week, or in 30 days, etc. And when they mature, the central bank gets its cash back, and the counterparty gets its collateral back. If repos are not renewed, they come off the balance sheet automatically and don’t cling to the balance sheet for years or decades like longer-term bonds do.
