ES Accounts (1 Viewer)

[EpicFailGuy]

Alrighty, so I have been re studying the DMO bit of the Monetary policy, and I have realised that I have no idea why the banks would want to buy the government securities. This may have been asked before but I spent atleast 30 mins searching for the answer in previous posts and couldn't find it anywhere.

So my question is why the hell do banks buy government securities? Is it an agreement, or a law or something?

 

[hopethisworks]

fail moar.


nb. dont mind me, im on my way to page 10

 

[veloc1ty]

To borrow money to lend to other people?

 

[lionking1191]

Alrighty, so I have been re studying the DMO bit of the Monetary policy, and I have realised that I have no idea why the banks would want to buy the government securities. This may have been asked before but I spent atleast 30 mins searching for the answer in previous posts and couldn't find it anywhere.

So my question is why the hell do banks buy government securities? Is it an agreement, or a law or something?

because its a method of setting the cash rate. they don't just announce every morning at 9.00 am what the new cash rate is and expect everyone else to follow suit - they have to use ESA as a means of influencing demand and supply of funds in the economy to effect a change

 

[veloc1ty]

He asked why banks buy securities, not the RBA.

 

[barbecuedflava]

no, its not compulsory or anything.

from what i can remember its because the securities are desirable - im not entirely sure why, i think its because there're safe and banks will snap them up as soon as they are offered. im not entirely sure on this, but i do know that its not compulsory to buy these securities

 

[veloc1ty]

I always figured it was just so they could make more money.

They could theoretically just lend out the money that people store in them, but because the interest rate differential is so small, the higher volume they turn over in loans the more they profit.

 

[yehdatsrite]

Alrighty, so I have been re studying the DMO bit of the Monetary policy, and I have realised that I have no idea why the banks would want to buy the government securities. This may have been asked before but I spent atleast 30 mins searching for the answer in previous posts and couldn't find it anywhere.

So my question is why the hell do banks buy government securities? Is it an agreement, or a law or something?

RBA DMO rarely involves the buy/sell of government securities anymore, as government securities involves government accumulating a debt. Instead Repurchase Agreements is the preferred instrument in DMO.

Repos the RBA issue is completely risk free, as the government will definitely purchase the security once it reaches maturity date. For financial institution it is a win-win agreement which involves the government selling Repos for cash to the financial institution & agreeing to buy back the securities at a later date for more cash. Hence, financial institution will hold Repos, thus RBA would have power in controlling the liquidity in the money market.

 

[Glenjamin]

You don't have to know what goverment securities are. I tend to think of if as gold. Everyone wants it but only few can have it

 

[gnrlies]

Because they need to in order to settle their debts to other banks. For example if St George customers withdraw from ANZ teller machines more than ANZ customers do the reverse, then St George will owe ANZ money (lets keep things simple by assuming an economy with only teller machines, but of course this includes all other commercial transactions between banks).

So in this case St George goes into debt and ANZ has surplus funds. This is where the cash market comes into play. St George would borrow from the cash market to repay ANZ and ANZ would lend money on this market in order to gain interest. This is why they are called ESA's (exchange settlement accounts). The RBA adjusts the cash rate by adjusting the supply of cash in this short term market.

Of course it is a lot more complex than this but this is enough for HSC economics.

 

[EpicFailGuy]

Anyways so I found out the answer to my question, and apparantly the banks desire the government securities cause they can earn interest on them? Sound right to everyone?

 

[leisl1990]

i asked my teacher this question. he said banks have some kind of mutual agreement with the rba wich specifies they have to .

 

[runnable]

Simply put. Banks have no choice but to buy them. Securities or repos.

 

[vmoore]

Anyways so I found out the answer to my question, and apparantly the banks desire the government securities cause they can earn interest on them? Sound right to everyone?

yes that is right. it is a way they can earn money