Central Banks' Central Bank Warns About Rehypothecation Threats

Just a few years ago, central bankers dared not breathe the word rehypotehcation - after all it was the secret fabric that held the shadow banking system together, which was a critical hub to perpetuating the central bankers' plan of reflating assets and creating a wealth effect if only for the 1%, while keeping the rest content with free Obamaphones and endless promises of "trickling down" which four years into Bernanke's grand monetary experiment has yet to materialize. Then, little by little, more and more started to realize that the shadow banking system, whose fiath-based (sic) liabilities amount to somewhere between $60 and $100 trillion (of credit money) globally, is precisely the inflation buffer that has allowed central banks to engage in round after round of QE, which has sent global stocks to all time highs, while keeping the world mired in the longest economic depression since the 1930s (explained here).

Of course, the one inadvertent side effect of all this constant meddling which be definition requires the monetization of quality collateral in order to generate new fungible money, was the gradual disappearance of all such quality assets which private investors could buy, then pledge back via repo and other conduits and use proceeds for risky investments. Such as Treasurys. Which is why recently none other than the TBAC warned that the US is suddenly facing a $10+ trillion high quality collateral shortage in the next decade. As we have also explained, this is a major problem for the Fed which at current rates of QEeing, will monetize all Treasury duration exposure in roughly 5 years - at that point there will be virtually no collateral left and the Fed will be finally out of both tools and ammo. Which in turn is why the Fed is desperate to restore the "moneyness" of assorted private sector assets in the time it still has with QE, and convert them to "high quality collateral" status, or eligible for repo and money creation via conventional bank conduits.

Indeed, the TBAC admitted as much in the confidential appendix to its Q2 slide presentation to the US Treasury when it said:

Private sector generation of moneylike collateral helps policymakers over long periods by:

Slowly reducing the demand for money
Increasing financial deepening
Supporting financial globalization

The more restricted the private sector’s ability to create safe, liquid, and moneylike collateral, the harder the public sector must work to supply it through deficits and easy monetary policy.

More here: http://www.zerohedge.com/news/2013-05-29/bank-international-settlements-warns-about-dangers-rehypothecation

Central Banks' Central Bank Warns About Rehypothecation Threats

Central Banks' Central Bank Warns About Rehypothecation Threats

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