Stablecoins, scarce reserves, and the end of intraday liquidity complacency
A new BIS Working Paper is pitching "auction-based liquidity saving mechanisms" as the solution to upcoming intraday liquidity stresses.
Before I head off on holiday, I wanted to flag a deceptively unremarkable paper just published in the BIS Working Paper series — one whose importance is almost camouflaged by its technical language and routine presentation. Yet, it touches on a topic that we hold dear: the underappreciated role intraday liquidity played in the 2008 crisis, and the extent to which the abundance of excess reserves has been quietly masking unresolved vulnerabilities in how RTGS systems manage intraday liquidity.
If you read our perpetual future Long Read, you will have picked up on these issues, not least because our standing position is that the invention of perpetual future may have inadvertently created a mechanism that can help manage upcoming intraday liquidity constraints without the need for de facto subsidization.
Thus, even though the BIS paper appears, at first glance, to be another dry contribution to the literature on payment systems, its substance is actually quite striking. Beneath the technicalities lies an implicit admission that the market can no longer postpone addressing these inherent weaknesses, and that a market-based solution will have to emerge sooner rather than later.
