Reading 54, page 220: “if depositors decide to withdraw their liquidity, regulated banks can take the assets that they were holding on leverage down to the Fed, rediscount them, and maintain liquidity.” My questions: 1) who are the “depositors”? 2) what does it mean by taking assets they were holding on leverage down to the Fed? 3) what does it mean to “rediscount” the assets? Much appreciate it.
depositors= me and you who have money at the bank. banks need to keep reserves at the Fed, so i think this is saying that if they need to they can go get those, but i think this would depend on the Fed’s discount rate which would have to go down so that the banks wouldnt have to keep as much capital w/ the Fed (this happened in '08, just think liquidity crisis—what happens? give banks money
my understanding is similar to Andrew… the depositors are a liability on the bank’s balance sheet and if they withdraw their money then the liability decreases but the assets still remain the same. To maintain the liquidity reserves, the banks will either have to 1. liquidate the assets or 2. raise cash so they can lower their leverage, and they usually opt for option 2, i.e use the assets as collateral to raise cash to maintain the liquidity levels. I think this is what happened in the 08 crisis when the Fed started taking in crappy assets(relative term) as collateral to provide liquidity.
So rediscounting effectively means lowering the interest rate thereby having less interest to pay so they have more cash on hand which means more liquidity? What are the “assets” they are referring to? I don’t know why I can’t wrap my head around this concept. Thanks guys
assets would be cash money…yes, liquidity means having cash on hand…does this make sense