No, this is completely wrong. Treasury bonds are often used as a collateral for borrowing reserves.
Reserves are balances that banks have on their account in FED and cash (paper money).
Reserves are something that does not have a counterparty risk - you either have it or you don't. (They have fiat value risk, but you don't need anyone to provide you anything else, like is the case with normal bank balance).
Reserves are also used to settle payments between banks, which is the real limit to creating new dollars. If I get a mortgage and wire it to another bank, the bank needs to pay with reserves held in central bank.
If they don't have enough, they go to repo markets (which briefly dried up in 2019, that's why many people learned about them, but they are huge) where the gov bond is used as the most common collateral.
This is where it gets tricky - because you can create dollars completely without dollar reserves. Usdt, DAI, eurodollar...
So a funny question - what happens when you wire an eurodollar created by Deutsche bank to JP Morgan?
it moves the dollars claims between the banks. one bank removes the liability the other adds it.
what is more fun is when the credit created as eurodollar cannot be repaid because of the defaults (usually when interest rates get higher).
behold boom-bust cycle
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How? What happens to the balance sheets? And how is it moved actually?
As I understand it, they remove the liability to depositor/sender and the target bank adds a liability to the receiving account.
deutche bank's reserves in FED (NY branch?) are decreased, morgan's increased.
They clear the operation via something like swift or similar system.
It's been a while since I dig into this field tho.
Eurodollar bank does not usually have an account with the FED. Otherwise they are part of normal dollar system.
Fun thing is - swift does not actually move the money, it's a messaging protocol to agree on how the movement is done.
well, not directly, but there must be a corresponding bank (account) which does. Otherwise they couldn't endup in a US bank, could they?
(I know that swift is more of a protocol).
How they settle balance sheets is probably up to them, isn't it? It's really been a while since I read how all that works.
Yes. Banks have accounts with other banks with balance. They can top them up short term with repo, long term with fx trade. It's basically a deposit account called nostro account. The key here is that eurodollars switch to dollars backed by reserves (central bank money) there.
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