FED Auction Question

Discussion in 'Economics' started by empee, Mar 13, 2008.

  1. empee



    Why would any bank that uses the facilities created NOT default?

    Since (I think) we can all agree that the collerateral is worth less than 100%, why not just keep the cash (treasuries) and let them keep the collateral?

    In short, WHY would you pay back your "loan from the FED" in this scenario?
  2. piezoe


    It's fairly simple. The collateral is illiquid, treasuries are not. Banks need their holdings to be liquid in order to function.
  3. Bingo!