Abstract
AbstractThe financial architecture prior to the recent financial crisis was a system of mobile collateral. Safe debt, whether government bonds or privately produced bonds, that is, asset‐backed securities, could be traded, posted as collateral, and rehypothecated, moving to their highest value use. Since the financial crisis, regulatory changes to the financial architecture have aimed to make collateral immobile, most notably with the BIS liquidity coverage ratio (LCR) for banks that requires that (net) short‐term (uninsured) bank debt (e.g., repo) be backed one‐for‐one with high‐quality bonds. We evaluate this immobile capital system with reference to a previous structurally identical regime that also required that short‐term bank debt be backed by Treasury debt one‐for‐one: the U.S. National Banking Era. The experience of the U.S. National Banking Era suggests that the LCR is unlikely to reduce financial fragility and may increase it.
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