The BIS in its quarterly review published yesterday included a reference to the eurodollar market (thanks to M. Daya for pointing it out). The central bank to central banks, as the outfit is often called, is one of the few official institutions that have taken a more objective position with regard to the global money system. Of the very few who can identify eurodollars, or have even heard of them, the BIS while not fully on board is at least open to the possibility that perhaps maybe their constituent central bankers don’t know what they are talking about.

So it was with some surprise to find that the piece was quite positive overall. It concludes that the market is, “not suffering a dollar shortage as in 2008-09.” This is misleading, for the statement is qualified in two very important ways. The first is the comparison to 2008-09, which is only somewhat an appropriate baseline given how the eurodollar system has evolved in the almost ten years since (more FX than deposits).

Second, and what is really the central idea, I believe, is that the BIS only makes this statement in reference mostly to the non-bank eurodollar channel.

Despite the loss of dollar funding owing to money market mutual fund (MMMF) reform in the United States, non-US banks’ aggregate US dollar funding rose to all-time highs in Q3 2016. In particular, deposits outside the United States have risen strongly, offsetting reduced funding from MMMFs.

This is an important distinction, and it suggests why there was a great deal of (legitimate) angst with regard to money market reform (2a7) last year. I’m not referring to the mainstream view of it, where 2a7 became the ultimate bogeyman for everything and anything that didn’t look right last summer and autumn. Primarily, those who referred to money market reform in the media were doing so without having the slightest idea what they were actually talking about. Instead, there has been an internal debate about the non-bank channel and specifically the role of money market funds within it, and it is within this discussion that 2a7 narrowly applied.