Banks are the problem: CLOs could be the solution
No bank would be too big to fail if banks were banned from using deposits to fund lending
Interesting questions! I'd expect there will always be players who want to sell the "liquidity options" to get the immediate positive carry (of borrowing short and lending long). Examples are ABCP conduits and SIVs that issue CP. There's nothing wrong with knowledgeable issuers and investors making these choices. What we wish to avoid is government insurance and futile regulation.
This is a bold idea which is either utterly flawed or brilliant. The dominant form of finance throughout history has been "banking", that is, selling mispriced liquidity options to depositors. But does it have to be that way? If we stop banks making a living by dancing on the edge of a knife, will a safer dominant form of finance emerge? Or will the liquidity risk simply move somewhere else?
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Comment by: Anonymous. Posted 10 years ago [2010-08-13 15:47:23]