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2016-06-01

The alchemy is “the belief that money kept in banks can be taken out whenever depositors ask for it”, Wolf

Lord Mervyn King, former governor of the Bank of England.  His book is called The End of Alchemy.

Central banks would still act as lenders of last resort. But they would no longer be forced to lend against virtually any asset, since that very possibility must create moral hazard.

They would agree the terms on which they would lend against assets in a crisis, including relevant haircuts, in advance.

In spring 2015, the value of the collateral of UK banks at the BoE was £314bn and of bank reserves was £317bn. This makes total liquid assets of £631bn. 

That is to be compared with deposits of £1.82tn.  



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