6.1The claim
In Chapter II Bagehot states what the holder of the final reserve must do in a panic; in Chapter XII he states how large the reserve must be beforehand and when the Bank must begin to act. Both rules turn on time: the reserve must be gathered before it is needed, and precautions must begin while the reserve still exceeds the danger point by what may be lost in the interval before they work. The two records' Invalidation fields also turn on a path in time. This case reads the rules and the revisit lines together, answers the article's question, and adds to the debate a reading of Chapter XII as a refusal of the fixed ratio.
6.2Hoarding and lending
Bagehot's first statement of the rule for an internal drain sets it against an instinct:
In opposition to what might be at first sight supposed, the best way for the bank or banks who have the custody of the bank reserve to deal with a drain arising from internal discredit, is to lend freely. The first instinct of everyone is the contrary. There being a large demand on a fund which you want to preserve, the most obvious way to preserve it is to hoard it--to get in as much as you can, and to let nothing go out which you can help. But every banker knows that this is not the way to diminish discredit. This discredit means, 'an opinion that you have not got any money,' and to dissipate that opinion, you must, if possible, show that you have money: you must employ it for the public benefit in order that the public may know that you have it. The time for economy and for accumulation is before. A good banker will have accumulated in ordinary times the reserve he is to make use of in extraordinary times.
A margin call is, from the lender's side, an act of the instinct Bagehot describes: a fund the lender wants to preserve is under threat, and the lender moves "to get in as much as you can". For a single lender in calm markets the instinct is sound; Bagehot's argument concerns the holder of the final reserve, for whom hoarding makes the panic worse. The records raise, and Bagehot's text sharpens, the question of what happens when every private lender acts on the sound instinct at once.
Later in the chapter he gives the reason that the holder of the final reserve can do what the others cannot:
An 'alarm' is an opinion that the money of certain persons will not pay their creditors when those creditors want to be paid. … If that alarm is not so met, it aggravates into a panic, which is an opinion that most people, or very many people, will not pay their creditors; and this too can only be met by enabling all those persons to pay what they owe, which takes a great deal of money. No one has enough money, or anything like enough, but the holders of the bank reserve.
Bagehot's definition of an alarm describes a margin shortfall in general form: an opinion that certain persons' money will not pay their creditors when the creditors want to be paid. His answer depends on there being holders of a bank reserve with enough money to meet the panic. A private margin system has lenders, each with some money, and none with "enough money, or anything like enough". Each can call; none can stop the calls.
6.3The rule as Bagehot wrote it
The rule for a compound drain, foreign and domestic at once, is the passage of Chapter II most often cited. Its context is a prescription in order:
Before we had much specific experience, it was not easy to prescribe for this compound disease; but now we know how to deal with it. We must look first to the foreign drain, and raise the rate of interest as high as may be necessary. Unless you can stop the foreign export, you cannot allay the domestic alarm. The Bank will get poorer and poorer, and its poverty will protract or renew the apprehension. And at the rate of interest so raised, the holders--one or more-of the final Bank reserve must lend freely. Very large loans at very high rates are the best remedy for the worst malady of the money market when a foreign drain is added to a domestic drain. Any notion that money is not to be had, or that it may not be had at any price, only raises alarm to panic and enhances panic to madness. But though the rule is clear, the greatest delicacy, the finest and best skilled judgment, are needed to deal at once with such great and contrary evils.
Two parts of the passage bear on collateral. The sentence "The Bank will get poorer and poorer, and its poverty will protract or renew the apprehension" says that the holder's own weakness feeds the panic it must allay: the co-deterioration of Case one at the scale of the system. And the last sentence calls the rule clear and its application delicate.
The second passage the parent study allows to be quoted from this chapter carries the point about confidence:
What is wanted and what is necessary to stop a panic is to diffuse the impression, that though money may be dear, still money is to be had. If people could be really convinced that they could have money if they wait a day or two, and that utter ruin is not coming, most likely they would cease to run in such a mad way for money. Either shut the Bank at once, and say it will not lend more than it commonly lends, or lend freely, boldly, and so that the public may feel you mean to go on lending. To lend a great deal, and yet not give the public confidence that you will lend sufficiently and effectually, is the worst of all policies; but it is the policy now pursued.
The rule is about a holder whose acts are public and whose resolve everyone can read. A margin system has no such holder; its lenders act privately, account by account, and the impression they diffuse together is that collateral is being called in everywhere.
6.4No fixed proportion
Chapter XII turns from conduct in a panic to preparation before one. Bagehot opens by rejecting the common notion that the reserve can be read off the weekly balance sheet as a third, or some other fixed proportion, of liabilities. His first objection is that the quality of liabilities matters as well as their quantity: "The intrinsic nature of these liabilities must be considered, as well as their numerical quantity." Case one found the same principle applied, in Chapter II, to the securities on the other side of the balance sheet. The objections also include the most striking passage on co-deterioration in the book. Bagehot considers how a foreign government holding bills on London could draw gold from the Bank, and traces the effect through the bankers' balances:
As soon, therefore, as the withdrawal of the German money reduces the bankers' balances, there is a new demand on the Bank for fresh discounts to make up those balances. The drain on the Bank is twofold: first, the banking reserve is reduced by exportation of the German money, which reduces the means of the Bank of England; and then out of those reduced means the Bank of England has to make greater advances.
The drain is twofold in exactly the sense the first record describes. One movement both shrinks the buffer and enlarges the claim on it. The Bank's means fall and, out of the reduced means, it must lend more. The record's assumption, that collateral value "declines together with losses on held positions", is the same structure written for a trading account.
Bagehot concludes that such demands "are not shown in the account of the Banking department at all", and then draws the conclusion about rules:
What is almost a revolution in the policy of the Bank of England necessarily follows: no certain or fixed proportion of its liabilities can in the present times be laid down as that which the Bank ought to keep in reserve. The old notion that one-third, or any other such fraction, is in all cases enough, must be abandoned. The probable demands upon the Bank are so various in amount, and so little disclosed by the figures of the account, that no simple and easy calculation is a sufficient guide. A definite proportion of the liabilities might often be too small for the reserve, and sometimes too great. The forces of the enemy being variable, those of the defence cannot always be the same.
Bagehot admits what the refusal costs: "unhappily, the rule which is most simple is not always the rule which is most to be relied upon." A fixed ratio was easy for the Bank to follow and easy for the public to check. Bagehot abandons it because the demands it guarded against were not visible in the figures it was a ratio of. Kay and King's recommendation of strategies robust to what cannot be foreseen, over optimisation on invented numbers (Kay and King 2020), sits close to this passage. The placing is this article's; the note on their work does not mention Bagehot.
6.5The apprehension minimum and the interval
Having refused a ratio, Bagehot puts something else in its place. It is a minimum defined by the public's state of mind, and a margin above it defined by time:
At every moment there is a certain minimum which I will call the apprehension minimum,' below which the reserve cannot fall without great risk of diffused fear; and by this I do not mean absolute panic, but only a vague fright and timorousness which spreads itself instantly, and as if by magic, over the public mind. Such seasons of incipient alarm are exceedingly dangerous, because they beget the calamities they dread.
The stray quotation mark after "apprehension minimum" is the transcription's. The phrase "they beget the calamities they dread" is Bagehot's statement that the fall of the buffer can cause the event the buffer exists to meet, the same circle seen at the Bank's own poverty in Chapter II. He then fixes the asymmetry that should govern the holder's choices:
Of course in such a matter the cardinal rule to be observed is, that errors of excess are innocuous but errors of defect are destructive. Too much reserve only means a small loss of profit, but too small a reserve may mean 'ruin.'
The asymmetry answers a pressure Chapter II had already named. The Bank's proprietors pressed for a smaller reserve, Bagehot wrote there, because "This is the natural desire of all directors to make a good dividend for their shareholders." Every reserve, and every margin of collateral above what is required, is idle money to the one who holds it.
The last element is time:
All the precautions of the Bank take time to operate. … And the right rate is often not discovered for some time. It requires several 'moves,' as the phrase goes, several augmentations of the rate of discount by the Bank, before the really effectual rate is reached, and in the mean time bullion is ebbing away and the 'reserve' is diminishing. Unless, therefore, in times without precaution the actual reserve exceed the 'apprehension minimum' by at least the amount which may be taken away in the inevitable interval, and before the available precautions begin to operate, the rule prescribed will be infringed, and the actual reserve will be less than the 'apprehension' minimum.
The structure is precise. There is a level below which fear spreads. There are precautions that work, but only after an interval. The reserve in calm times must therefore exceed the danger level by at least what can be lost during the interval. Bagehot then puts figures to it, while calling them conjectures:
Then I should say, putting the foregoing reasoning into figures, that the Bank ought never to keep less than 11,000,000 L.. or 11,500,000 L. since experience shows that a million, or a million and a half, may be taken from us at any time. I should regard this as the practical minimum at which, roughly of course, the Bank should aim, and which it should try never to be below. And, in order not to be below 11,500,000 L., the Bank must begin to take precautions when the reserve is between 14,000,000 L. and 15,000,000 l.; for experience shows that between 2,000,000 L. and 3,000,000 L. may, probably enough, be withdrawn from the Bank store before the right rate of interest is found which will attract money from abroad, and before that rate has had time to attract it.
The figures are Bagehot's own, given for the conditions of his day, and he presents them for the judgment of others: "It will be said that this estimate is arbitrary and these figures are conjectures. I reply that I only submit them for the judgment of others." What matters for this article is the form of the rule, not the figures. It names a level, a margin above the level, the reason for the margin (what can be lost before the remedy works), and a point at which action must begin.
6.6The records' revisit lines
The two records' Invalidation fields can now be read against that form. The first record's reads:
Update Condition: if the account stress reflecting co-deterioration stays within limits and an operational response means is confirmed, the risk assessment is renewed. / Next verification: calculate the case in which collateral prices and position prices move adversely together.
The second record's reads:
Change condition: if account risk comes within the limit through actual exposure adjustments or confirmed collateral changes, the operating range is re-evaluated. / Next verification: calculate the path by which account collateral is depleted before individual stop-loss measures take effect.
In both Korean originals the first label is the same word, 변경 조건, a change condition; the English translation renders it differently in the two records.
Set beside Bagehot's rule, the revisit lines share three of its features and leave one open.
First, each names a stress that moves the buffer and the claim together. The first asks for the case "in which collateral prices and position prices move adversely together", which is the twofold drain of Chapter XII. The second asks for the path on which collateral runs out "before individual stop-loss measures take effect", which is the inevitable interval: the time between the onset of loss and the moment the defence begins to work. That is the most Bagehotian sentence in either record. It asks, as Bagehot asked of the Bank, what can be lost before the remedy acts.
Second, neither revisit line sets a fixed proportion of collateral to exposure. Each makes renewal depend on a stress result and on something confirmed in practice: "an operational response means" in the first, "actual exposure adjustments or confirmed collateral changes" in the second.
Third, each insists on what is actual, as Bagehot's Consols passage did: the first record's required evidence includes "actual availability of alternative collateral", and the second's change condition speaks of "actual exposure adjustments".
What they leave open is Bagehot's level and his margin. Neither revisit line names the level below which the account is in danger, beyond "within limits" and "within the limit", which point to limits the records do not give; neither names the margin that should trigger action, or how long the stop-losses or the operational response take to work. Bagehot gave figures and called them conjectures. The records give the shape of the computation and no figures, which means that a reader could not, from the records alone, tell on a given day whether the condition for renewal had been met.
6.7The answer to the question
The question was whether a margin call assumes about the reserve what Bagehot's panic rule assumes. The answer has two parts.
Bagehot's rule assumes that there is a holder of a final reserve, that the holder has gathered the reserve before the panic, and that the holder lends it against good security without trying to sell the security, because in a general panic there is no one to sell to. The rule does not assume that securities keep their market value in the panic; Chapter II says outright that they cannot be sold. It assumes instead that lending against them will restore the market in which they have value.
A margin call, as these two records frame it, assumes something different. It assumes that the collateral already posted will be worth, on the day of the call, something close to what the system counts it as worth, and that the borrower can find more collateral or cash elsewhere. Those are the assumptions Bagehot attributed to the Bank's directors when they held that the Banking Department could strengthen itself by selling securities, and that he called a complete dream. The two records do not share the dream. Their example judgments refuse to count collateral by quantity, and their revisit lines ask for the twofold drain and the interval. But the options they offer, including Prepare Alternative Collateral and Continuously monitor collateral headroom, all stay inside the account. None names a holder outside it, and none says what happens if every account is called at once.
This case adds to the debate a reading of Chapter XII as an argument against setting a buffer by a fixed ratio, on the ground that the demands it must meet are not visible in the figures the ratio is taken from. The records follow that argument in refusing a ratio, and stop short of it in leaving the level and the margin unnamed.