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repurchase agreements, the Fed stepping in to curb short-term borrowing costs

Quote from David D on 09/22/2019, 8:55 AM

Putting the Fed Funds rate and/or comparisons with 2018 aside for a bit: I'm still a bit confused as to how (some?) repo rates spiked to 10%, necessitating Fed intervention. Can't banks supply all the cash that is needed, using the discount window to satisfy reserve requirements if necessary? Given that the discount rate is currently 2.5%, I would think that private banks could profitably provide the cash needed by non-bank actors in the repo markets at much lower rates than the reported spikes. Bottom line, I was under the impression that the discount window was already a  "standing Fed intervention," so I'm unclear as to why a different Fed intervention was necessary. I've also read that the lowering of the IOER rate could mitigate these types of situations, but that implies that banks wouldn't even need to use the discount window (i.e. since they have excess reserves).

Note that I'm assuming the spikes were for non-bank actors, because otherwise it would make even less sense (given the discount window facility available to them). But given that I'm obviously missing something fundamental here, that assumption could be incorrect. It seems that the main thing I missing is why banks would be unwilling (or unable) to enter into repurchase agreements charging approximately the same rate as the Fed Funds rate.


I had the same questions - see further up the thread.  Cullen suggests that banks go to the Fed Discount window when they can't get reserves elsewhere - or at least that is what I think he said.  I too have decided (for now) that the spikes were for non-banks.

Banks will really only go to the DW when all the other options have been exhausted. Here's a good read on this.

Remember, last week's spike in repo rates was on a relatively small amount of transactions and it only last for a few hours. The media only reported on the 99th percentile of transactions that occurred at very high rates though. They totally blew this thing out of proportion.

It's funny because repo rates have now collapsed to their lowest levels in over a year.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Since the banks have $1.5 trillion of reserve deposits with the Fed and $2.1 trillion of checkable accounts it would seem unlike that any bank would need reserves.  This repo transaction (or transactions) was probably not a "reserve" trade but a non-bank institution seeking a short term loan.  Just a guess but maybe this was a Saudi trade.  Friday night - Saturday morning  Saudia Arabia lost 4 million barrels/day or about $250 million in crude exports.  By Monday their cash flow would have been down about $750 million.  Possibly the Saudis were trying the raise some short term cash  ($500-750 billion?) with a repo trade or a series of repo trades to provide 4 or 5 days of financing until they could put in place a longer term financing plan.   When they began to run out of buyers for their repos the Fed intervened to keep the market from going crazy (or crazier)?  Just a guess.


That's a terrible article. The financial system didn't run out of cash.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Yeah, but's the conservative gold bug doom porner bias for you.  I'm amazed they managed to work Bitcoin into it.

What about the rehypothecation claims, though?  It would seem that could drastically increase leverage in the system (systemic risk) without it being obvious from the books.


You all might enjoy reading this from Frances Coppola: