Typography

One of this blog's most recurrently popular posts is a 2012 ditty entitled the Idiot's Guide to the Federal Reserve Interdistrict Settlement Account . The Interdistrict Settlement Account, or ISA, is a highly esoteric "plumbing" mechanism that lies at the centre of the Federal Reserve System. After a century of being ignored, it suddenly became a popular topic for discussion in late 2011 and 2012 as the breakup of the euro became a real possibility. Groping for a fix, European analysts turned to the world's other large monetary union, the U.S. Federal Reserve System, to see how it coped with the sorts of monetary problems that Europe was then experiencing. Here's a short explanation of the ISA. Consider that there is no such thing as a unified Federal Reserve dollar. Rather, both the paper dollars that you hold in your wallet and the electronic reserves that a private bank holds in its vaults are the liability of one of twelve distinct Federal Reserve district...

(Disclaimer: this article is geeky. If you want to follow it, you should already know a bit about the European Target2 imbalances debate ( here is a good intro) and have read my description of the US Interdistrict Settlement Account) There is a tension involved in being a lender of last resort. Central banks are supposed to provide liquidity to solvent but temporarily illiquid institutions during a liquidity crisis. But they're not supposed to go as far as keeping bankrupt banks or governments alive. Hans-Werner Sinn ’s proposal to import the Federal Reserve's Interdistrict Settlement Account (ISA) into the Eurosystem seems to me to be an attempt to impose on National Central Banks (NCBs) the discipline necessary to prevent them from crossing this almost transparent line. But an ISA-type settlement mechanism in a European setting threatens to not only prevent NCBs from crossing the line; it could prevent them from fulfilling even their basic duty as lender of last resort. Thi...

Bankers clear and settle with each other at a clearing house Perry Mehrling had in interesting comment about how to settle the Eurosystem's Target2 imbalance problem. If there were Eurobills, balances could be settled periodically by transfer of assets, just as is done in the Federal Reserve System. More precisely, if there were a System Open Market Account at the ECB, in which all of the national central banks held shares, settlement could be made by transfer of shares. Perry is talking about adapting the structure of the Fed's Interdistrict Settlement Account to Europe. To understand the ISA, check out my Idiot's Guide to the Federal Reserve Interdistrict Settlement Account . In short, the 12 regional Reserve banks run up debts and credits to each other over the course of the year due to changes in payments flows. These debts and credits are settled each year by transferring securities that have been bought in open market operations from debtor Reserves banks to credit...

Last year and earlier this year, debate concerning the Target2 mechanism in Europe and its growing imbalances shed some light on the equivalent institution in the US, the Interdistrict Settlement Account (ISA). The argument has been made to import the ISA structure into Europe, in particular, the yearly settling of accounts between district Reserve banks. If the ECB were to operate this way, the idea goes, then there would be some sort of quid pro quo on Target2 imbalances - European national central banks (NCBs) would not be able to accumulate debts to each other ad infinitum. The observation was made that contrary to what one might expect, the ISA at the time did not seem to be balancing. Thus the idea that adoption of the Fed model would impose "firm limits" on intra-Eurosystem credit is invalid, since the Fed doesn't seem to always impose settlement on district Reserve banks. This April, though, the ISA seems to have been settled, as the charts below will illustrate....

Michiel Bijlsma and Jasper Lukkezen have a very good article on the Bruegel blog that deals with the question: why is there no Target2 debate in the US? On a purely technical note, they bring up an interesting point that Interdistrict Settlement imbalances can arise not just from capital outflows from one district to another, but from the daily redistribution of SOMA assets bought on behalf of the other Reserve banks by the New York Fed. I hadn’t previously considered this mechanism and consider it to be a good addition to understanding the debate. More controversially, they maintain that ISA imbalances primarily arise from SOMA redistribution and that regional capital flows contribute fewer imbalances. Perhaps, but that’s an empirical question. Continuing on a purely technical note, Bijlsma and Lukkezen note that when the FRBNY purchases from a counterpart with a depository account at one of the FRBs, this particular FRB then credits the counterpart’s depository account, which incre...

The Belgium-based think take Bruegel recently linked to my guide to the Federal Reserve Interdistrict Settlement Account . In my ongoing attempt to ensure the Target2 debate doesn't founder on faulty comparisons to the Interdistrict Settlement Account, here's another post. Although they have a better grasp on how the ISA works than most, the authors Michiel Bijlsma and Jasper Lukkezen do make an important error: The important difference between Target 2 and ISA, however, is that in the US all Reserve Banks are owned by the federal government. This means that in the US it is possible to safeguard the integrity of the system by changing the settlement rules. This is as exciting as a game of monopoly among friends. As all Federal Reserve banks are owned by the federal government, a loss in Richmond is irrelevant when there is an equal gain in New York. In the Eurozone, however, the ECB is owned by the national governments via the national central banks, not by the European Union ...

The argument about ECB Target2 imbalances, an argument which began in mid 2011 with this article, continues to be reignited in various arenas. One component of the argument is the comparison of Target2 to the Federal Reserve’s mechanism for settling inter-Fed settlement imbalances; the Interdistrict Settlement Account. Because the various debaters often have such diverging views on how the Interdistrict accounts are settled, I’m donating this post to the blogosphere with the goal of ensuring that the debate doesn't founder on faulty comparisons of Target2 to the Interdistrict Settlement Account. As such, I'm going to talk a bit about the history of Interdistrict settlement, how the process has changed over time, and how it works now. Once that's done I'll bring the discussion back to Target2 in order to pin down the comparison in a more robust way. I don't claim to know everything about these mechanisms; I've just spent a few weeks educating myself, so if I am ...

Perry Mehrling wrote an interesting post called Why did the ECB LTROs help? He visits the comparison of the Federal Reserve Interdistrict Settlement Account and the ECB Target2 settlement mechanism . I have also found this comparison in a number of other publications, see the list at bottom. Here is the comment I left at the Money View blog. My reading of the Euro-system rules is that deficit national central banks (NCBs) never have to settle with surplus NCBs. These intra-system balances can grow ad infinitum. Thus, deficit NCBs don't have to worry about owning acceptable assets for settlement, since there is no ultimate day of reckoning. The result is that survival constraints for Eurosystem NCBs are far looser than the survival constraints faced by regional Federal Reserve banks, which must settle each year. In the old days this settlement was conducted by transfers of gold certificates amongst regional Federal Reserve banks. After 1975 the settlement medium was switched to secu...