The repo market’s wobbles have revealed unforeseen consequences of post-crisis banking regulation
, for the first time in a decade, the Federal Reserve intervened in the overnight repurchase, or “repo” market, where banks and hedge funds get short-term funding by swapping $1trn-2trn of Treasuries for cash each day. After the repo rate rose to 10%, the federal-funds rate, at which banks can borrow from each other, climbed above the Fed’s target . The Fed swooped in, offering $75bn-worth of overnight funding, and both rates came back down.
Under the old system, if commercial banks were short of cash the quantity they sought on the repo market would rise. When cash became superabundant the Fed lost any insight into banks’ thinking about how much cash they needed to hold. Now the repo-market turmoil has given an answer—and it is far higher than the Fed expected. Collectively, America’s commercial banks now hold $1.3trn of cash.
That has left more for American buyers to mop up. “Primary dealers”—banks authorised to deal Treasuries directly with the government—bear the brunt of these market forces. Their holdings of Treasuries have ballooned. In 2017 they held $200bn-worth of Treasuries outright, and financed positions worth an additional $1.5trn in the repo market. By September this year these figures had risen to $250bn and $2trn respectively.
Some bankers say they hold more cash than legally required because they fear that miscalculating and having to borrow from the Fed would damage their reputations. Steven Mnuchin, the treasury secretary, has said it might be possible to change the rules in such a way as to increase liquidity without increasing risk. But any change would draw heavy political crossfire.
France Dernières Nouvelles, France Actualités
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