What do you make of some recent commentary that has used your research to build a case against, among other things, repo, rehypothecation and the shadow banking system?
I don’t think that people are linking the big and small pictures. Rehypothecation is not a four-letter word. The financial system needs lubrication, and collateral chains help markets get completed. They connect the hedge fund with assets with someone who needs collateral. The question is do we need short or long chains? People can argue that financial stability improves with shorter chains, but if the chain is down to two counterparties, then there is a clear risk of liquidity drying up. We have tracked a $5 trillion reduction in global source collateral and associated chains. These are big numbers. Monetary policy cannot be achieved in a vacuum and collateral chains cannot be ignored.
Following the ECB’s final scheduled meeting...
