The unwinding of quantitative easing would alleviate
pressure on broker-dealer balance sheets and boost securities
lending, according to Dr Manmohan Singh,senior economist,
International Monetary Fund (IMF).
"If central bank balance sheets are unwound, the flipside
is that banks will get balance sheet space. If banks get
balance sheet space then some businesses – including
securities lending – would get a chance to do
more in the financial system."
Central bank quantitative easing continues in the Bank of
Japan and ECB but the Fed has surely reached its peak and
ultimately all central bank balance sheets will be
unwound. For now, they remain measured in trillions of dollars
globally including $4.5trn at the Fed.
"If central banks change tack and securities do not get
rolled over you will start to see [bank] balance sheet space
appear a lot faster [than expected]. This can help collateral
become a lot more fluid," he told the IMN US Beneficial
He said that there is evidence from recent significant sales
of Treasuries by emerging market central banks that the market
can absorb sales of assets currently locked away in silos.
"Central bank balance sheet unwinding gives space and helps
the dealer community accommodate a lot more transactions that
they are not willing to do right now."
There has of course been an expansion of AAA securities "but
much of these securities has been silo-ed" on central bank
balance sheets so "they have no velocity". This is a problem
because "AAA lubricates the other collateral to move" in the
collateral upgrade chain.
"There is a disconnect now between the [broker-]dealer
balance sheet at what is happening outside dealer balance
sheets. Until recently they were the fulcrum… now
central banks have taken a lot of good securities."
He noted that the levels of pledged collateral (reusable,
with title transfer) in the 15 largest banks has decreased
since the financial crisis and remains much lower for half a
decade, from around $10trn to $5.65trn in 2015 and, at the
moment, "they are not bouncing back".
"Less AAA leads to less efficiency and ease of pricing" of
all other types of collateral. "Once collateral is with the
market, it moves."
Since a seminal Reserve Bank of Australia paper
investigating the velocity, or reuse, of collateral there has
been many studies into its significance for the functioning of
markets. A recent CGFS paper identified that collateral reuse
and rehypothecation is decreasing.
Singh said velocity had decreased from three at the time of
the Lehman crisis to below two now. "Collateral is coming in
– but it is not being circulated in the way it used to
When it ends up at the central bank "it’s a
closed loop"."The money printed takes balance sheet space
– trillions of space. If that space is unclogged, you
would have space at the banks which would allow them to do
"Whether those securities come out and what it means for
securities lending is huge."