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Somewhat related: If the bank actually had to put up the whole amount the central bank would have to duplicate the whole credit evaluation process since nearly all funding would stem from the discount window. Or am I completely wrong?
It's a bit like quality control or customs inspections. You don't want to inspect every item in every box in every container but if you sample and do find a faulty item you can quarantine an entire shipment pending further investigation.
Evidently, running the discount window properly would require a lot more manpower than banking supervisors currently deploy... Economics is politics by other means
On the other hand, if the central bank imposes a 10 % haircut for the bank on top of the 20 % margin it forces on the borrower, it can probably make do with rules of thumb for most asset classes. Few houses are 28 % below their official valuation even in a deep crisis. They might drop 28 % below the bubble value, but the CB would only be on the hook for 72 % of the official value. The rest would be margin - something that would, in itself, discourage bubbles.
- Jake Friends come and go. Enemies accumulate.
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