The $2.2 trillion repurchase agreement market - part of the inner workings of th...
- The $2.2 trillion repurchase agreement market - part of the inner workings of the U.S. financial system - is facing what could be another strain as the year comes to a close. That could have wider implications than just Wall Street.
Interest rates in U.S. money markets shot up to as high as 10% for some overnight loans, more than four times the Fed’s rate. The big four banks, which BIS did not name in its report, have become net providers of funds to repo markets as they account for more than half of all Treasuries held by banks in the United States at the Federal Reserve.The repo market underpins much of the U.S. financial system, helping to ensure banks have the liquidity to meet their daily operational needs and maintain sufficient reserves.
But when investors become fearful of lending, as seen during the global credit crisis, or when there are just not enough reserves or cash in the system to lend out, it sends the repo rate soaring above the federal funds rate. Coming out of the financial crisis, after the Fed cut interest rates to near zero and bought more than $3.5 trillion of bonds, banks built up massive reserves held at the Fed.
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