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The Collateral Multiplier: TBL Weekly #160

Augustine Carrasco

Oct 10

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Dear Readers,

Inspired by last week’s positive feedback on our Ample Reserves Framework primer, this week, we continue our educational content and dive deeper into the implications of a stable Treasury market.

As many of you know, one of the main pillars of our TBL Liquidity framework consists of bond volatility. But how does bond volatility actually connect to liquidity, and therefore bitcoin?

Let’s start with what many of you bitcoiners already know quite well: a fractional reserve system.

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Money multiplier chain

Also known as the deposit-to-reserve ratio, the money multiplier is the bedrock over which today’s ever-expanding credit system stands. Using a simple multiplier of 10 for exemplary purposes, when a bank incurs an increase in reserves of $1000, the entire banking system creates $10,000 in deposits through a chain of events:

Round 1: Initial deposit: $1,000
- Reserves = $100
- Loan out = $900

Round 2: Borrower receives $900 and deposits it in his bank
- Reserves in second bank = $90
- Loan out of second bank = $810

So on and so forth, until there is no money left to lend out. At that point, the banking system has increased its money supply by a factor of 10, the money multiplier.

Thus, money multiplier = Deposits / Reserves

Collateral multiplier

Conceptually, the collateral multiplier works in a similar way, but through ‘collateral chains’ in the Shadow Banking system, and with Treasuries and Securities Financing Transactions (SFTs)—this is what ties U.S. Treasuries, money markets, bond volatility, and liquidity all together.

Before getting into our example, let’s break it all down into its individual components and participants:...

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