Fall 2016: Danger ahead for the global banking system: rehypothication and derivatives clearing

Central Banks and various global government powers coordinated a massive banking system bailout in the early days of the 2007-10 global financial crisis. Trillions of dollars in direct liquidity infusions, loan guarantees, and toxic debt relief were provided to major financial institutions, including: Deutsche Bank, Barclays, Bank of America, Citigroup, Royal Bank of Scotland, Morgan Stanley, Goldman Sachs, JP Morgan Chase & Co, Credit Suisse, BNP Paribas, UBS AG and numerous others.

Six short years later, the global banking system is once again ‘teetering.’  And there is a distinct potential for things to deteriorate badly.

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Raoul Pal:  Business Cycle Tinder for a Global Banking System Fire                    ZeroHedge Sep 18, 2016

Excerpt:                                                                                                                                    “I spent a long time looking into the clearing and custody system; the DTCC in America and Euroclear in Europe. Those government bonds that are at the heart of the derivatives industry, they’re the collateral for everything in the entire loan industry, those things are re-lent out something like 30 times in the system to allow for this leverage.

The problem is nobody actually has full claim on the bonds within the custody system. So, if one of the countries in Europe defaults, or something happens where Santander goes bust and Spain goes bust on the same day, the systemic problems within the custody system and the derivative industry, all the collateral and settlements is beyond anybody’s imagination.

The system cannot allow for there to be sovereign risk because if there is sovereign risk then there is no risk-free collateral, and that is a real issue and would break the entire global banking system in one day. Which is one of the reasons they were so careful back in 2012 not to let anyone technically default because had they done that, basically it takes down everything we know of as a banking system. We would have to reprice what we understand to be the risk-free rate, we wouldn’t have a risk-free rate.”

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It is time for  a clean economic reset – featuring economic liberty, massive all sectors debt reduction, balanced budgets, and revitalized global economic growth.

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