In a recent tweet, Arthur Hayes, co-founder of BitMEX, has drawn attention to an alternative solution for bailing out non-US banks that may not be obvious to the average person. The tweet highlights a potential solution for the US Federal Reserve to assist foreign banks that are facing deposit outflows, without selling treasuries into a potentially illiquid market.
The issue with the US Federal Reserve directly bailing out foreign banks is that it could be seen as politically toxic, especially at a time when domestic banks are also in need of assistance. As such, an alternative solution has been proposed: the US Federal Reserve provides a swap line to a major central bank, such as the European Central Bank (ECB), which then allows EU banks to give treasuries at par to the ECB.
The ECB would then give dollars to the banks, which could then handle any deposit outflows. In turn, the ECB would get dollars from the US Federal Reserve using the swap line. This would mean that no treasuries are actually sold, and any negative profit and loss is borne by the central bank, who can handle infinite losses.
Hayesâ tweet also suggests that the $ swap line balances would balloon, which would reflect on the US Federal Reserveâs balance sheet. Currently, US banks hold $4.4 trillion worth of treasuries and mortgage-backed securities, while foreign banks hold an unknown amount. The proposal would allow all treasuries held in the entire developed country banking system to be lent against at par, which could potentially be a game-changer.
In a previous tweet, Hayes stated that âItâs All Over!!!â and suggested that this was what happens when no one wants to hold USD in banks that canât borrow from the Fed using bank term funding programs. He also questioned how the Fed can hike interest rates when it is handing out dollars to its peers.
It is important to note that this proposal is not without risks, as it could potentially lead to an increase in inflation and a depreciation of the US dollar. Nevertheless, it is an interesting idea that highlights the complexities of the global financial system and the various tools that central banks have at their disposal. As the world becomes increasingly interconnected, it is likely that we will see more innovative solutions being proposed to deal with the challenges of the global economy.
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This article was republished from azcoinnews.com
