Duncan’s Economic Blog

Liquidity & the Crisis

Posted in Uncategorized by duncanseconomicblog on August 5, 2011

Gilliam Tett today in the FT makes for alarming reading pointing out the worrying parallel between what is unfolding inEurope and what happened in theUS in 2008.

One point in particular strikes me as being crucial – the continued reliance of banks of short term funding. Which leaves them exposed to rapid moves in short term market rates – a la 2007/08 and now 2011.

I’m not denying that many Eurozone banks face a solvency crisis but in the coming days a liquidity crisis could have a wide spread impact on all banks in Eurozone – and indeed beyond, the poor results from Lloyds & RBS leave them looking exposed.

The news that BNY Mellon (a large US bank) is now charging to hold large deposits (actual nominal negative interest rates) is especially alarming. It suggests to me that the reports of US banks and money market funds pulling cash fromEurope and holding in theUS are true.

Some US banks risk being flooded with cash whilst Eurozone ones are starved.

Watching the inter-bank lending rates in the next few days will be crucial.

This really does remind us of the importance of liquidity regimes – something George Osborne reportedly wants to scale back in the UK.

All of which reminds us of the importance of liquidity preference.

6 Responses

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  1. Left Outside said, on August 5, 2011 at 10:27 am

    /arghhh!

  2. Graphs of Doom! « Left Outside said, on August 5, 2011 at 10:42 am

    […] Duncan highlights, BNY Mellon has recently even started charging people to store money there, so worried are […]

  3. […] Duncan highlights, BNY Mellon has recently even started charging people to store money there, so worried are […]

  4. jomiku said, on August 5, 2011 at 2:32 pm

    This isn’t the same thing: when they’re referring to liquidity, they mean a short-term solvency crisis, not an actual funding problem. I don’t see this playing out the same with regard to sovereign debt because the banks will, on the whole, be able to roll over that shorter term sovereign debt. The problem would be other short-term debt they need to roll over. The problem in 2008 was the collapse of Lehmann left a literal shortage of dollars, which is a rare example of actual liquidity failing, like when your oil runs out and the engine seizes. That liquidity problem immediately sparked off solvency problems and revealed many more, notably the failure of models used to securitize real estate. Here, we’d be talking about a solvency problem creating larger solvency problems.

    It is entirely unclear as of now what other short-term roll over issues may exist for Eurozone banks. If the issue is really just sovereign debts, then the likelihood of another disaster of 2008 magnitude is pretty low. The weird thing running through these papers is that sovereigns couldn’t roll over debt. Where does that come from? As far as I can tell, it comes from the idea that Germany, France and other Euro nations decide to let their world crumble and the Euro crumble. Is that much of a possibility? People are dumb but are they really that dumb?

  5. […] now, as Duncan Weldon reports, we have banks openly offering negative returns, because everyone knows the alternative is […]

  6. […] Robert Peston blogs on the origins, and likely outcomes, of Thursday’s market mayhem. Richard Murphy argues that this fresh crisis provides an opportunity to build the economy anew and dispense with the failed neo-liberal project. Duncan Weldon provides some thoughts on liquidity and the crisis. […]


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