Bitcoin & Markets
Shadow Banking Secrets: Collateral Multiplier - E374
Sep 30, 2023
The podcast discusses the concept of collateral rehypothecation in the US financial system and its impact on supply elasticity. It also explores the functioning of the shadow banking system and its relationship to US treasuries, highlighting the importance of understanding these dynamics. The speaker also provides updates on recent action in the Bitcoin space, including Gary Gensler's testimony and the demand for a Bitcoin ETF approval.
30:17
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Quick takeaways
- Collateral reuse in the repo market creates an elastic supply of treasuries in stable times but leads to a decline in elasticity and treasury supply during times of crisis or tighter conditions.
- The decline in elasticity through collateral reuse has a greater influence on treasury yields than factors like QE or issuance, and the decrease in collateral reuse combined with increasing demand for treasuries drives yields down.
Deep dives
The Impact of Collateral Reuse on Treasury Yields
The episode discusses the impact of collateral reuse on treasury yields. It explains that rehypotication of treasuries in the repo market allows for elastic supply when the market is stable. However, in times of crisis or tighter conditions, supply becomes more inelastic as collateral chains shorten. This leads to a decline in elasticity and a decrease in treasury supply. The episode asserts that the decline in elasticity has a greater influence on treasury yields than factors such as QE or issuance. It also highlights the significant amount of rehypoticated treasuries in the market, estimated to be around $220 trillion, which far exceeds the market impact of government debt or Federal Reserve policies.
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