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.
Since September, the New York Federal Reserve has offered daily operations where it injects liquidity into the overnight market, in addition to frequent offerings of longer-term loans. It is the Fed’s first major market intervention since the financial crisis more than a decade ago. The Fed’s repo operations are made only with major dealers, with the banks in turn passing liquidity on to their clients.
In repo trades, borrowers offer U.S. Treasuries and other high-quality securities as collateral to raise cash, often overnight. The next day, they repay the loans plus what is typically a nominal rate of interest and get their bonds back. In other words, they repurchase, or repo, the bonds. Trading in stocks and bonds can become difficult. It can also pinch lending to businesses and consumers and, if the disruption is prolonged, it can become a drag on a U.S. economy that relies heavily on the flow of credit.
But that level of bank reserves, which peaked at nearly $2.8 trillion, began falling when the Fed started raising interest rates in late 2015. It fell even faster when the Fed started to cut the size of its bond portfolio about two years later.
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