The September mayhem in the U.S. repo market suggests there’s a structural problem in this vital corner of finance and the incident wasn’t just a temporary hiccup, according to a new analysis from the Bank for International Settlements. This market, which relies heavily on just four big U.S. banks for funding, was upended in part because those firms now hold more of their liquid assets in Treasuries relative to what they park at the Federal Reserve, officials at the Basel-based institution concluded in a report released Sunday. That meant “their ability to supply funding at short notice in repo markets was diminished.” And hedge funds are financing more investments through repo, which “appears to have compounded the strains,” the researchers added. This brings the BIS, the central bank for central banks, into a controversy that has vexed observers for almost three months: Why did the repo market get so bad, so quickly? On Sept. 17, rates on general collateral repo briefly surged to 10% from around 2%. Many, including the Fed, concluded in the immediate aftermath that two transitory events collided: investors used repo to finance the purchase of a large batch of newly auctioned Treasuries at the same time that quarterly corporate tax payments drained liquidity from that market. But the BIS doubts an ephemeral supply-and-demand imbalance is totally to blame. “None of these temporary factors can fully explain the exceptional jump in repo rates,” Fernando Avalos, Torsten Ehlers and Egemen Eren wrote in the latest BIS Quarterly Review. READ MORE ABOUT REPO MARKET TURMOIL Repo-Market Minnows Say Fixing Mess Means Going Beyond Big Banks Repo Fretting Shifts to Treasuries as Market Faces Next Test Repo Rout Didn’t Have to Happen. Powell Is Trying to Avoid Rerun Repo Market’s Liquidity Crisis Has Been a Decade in the Making Why the Fed’s Pumping Big Money Into the Repo Market: QuickTake Reserves -- or cash that banks stash at the Fed -- are the easiest asset for banks to tap when they want to quickly move money into repo. And it would’ve been logical for banks to pour cash into repo to get those 10% returns from an overnight loan. The four banks that dominate the market hold about 25% of the reserves in the U.S. banking system, but 50% of the Treasuries. That mismatch likely slowed the movement of cash into repo, the BIS researchers postulated. Volatility in the amount of cash the U.S. Treasury keeps parked at the Fed also affected banks’ reserves. “The resulting drain and swings in reserves are likely to have reduced the cash buffers of the big four banks and their willingness to lend into the repo market,” the team wrote. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has put the blame on regulators themselves. He said in October that his firm had the cash and willingness to calm short-term funding markets but liquidity rules for banks held it back. Along with changing market structure, the researchers also connected the repo ruckus to banks being somewhat out of practice in daily reserve management. That’s because trillions of dollars worth of Fed asset purchases -- the so-called quantitative easing program meant to help the economy recover from the 2008 financial crisis -- had left the banking system flush with cash for years. “The internal processes and knowledge that banks need to ensure prompt and smooth market operations may” have started to decay, they wrote. “This could take the form of staff inexperience and fewer market-makers, slowing internal processes.” The Fed in 2017 started shrinking its balance sheet and shortages began to re-emerge last quarter. The Fed stopped paring back its holdings in August and started buying Treasury bills in October, an attempt to add reserves to the banking system. That was part of its campaign to keep the repo market calm, an effort that began in September with overnight and then longer-term repo operations. “These ongoing operations have calmed markets,” the BIS researchers wrote. Still, market participants are wary that trouble may resurface at year-end -- a time when repo liquidity has historically been scarce. There’s been high demand from money-market participants for cash via repo that the Fed’s been offering with tenors that will extend into the new year. The report also took a look at the European repo market, which escaped the kind of turmoil that engulfed the U.S. in September. But that doesn’t mean all is calm. Beneath the surface, the 8-trillion-euro ($9 trillion) market is becoming increasingly fragmented, raising the risk that cash may not flow through properly, the BIS said. https://www.bloomberg.com/news/arti...-fueled-by-big-banks-and-hedge-funds-bis-says
It's almost like being one of the major players in the largest financial collapse since the great depression, playing in grey areas with too much leverage, and almost destroying the global economy has the effect of increased regulation because you can't be responsible with your power. Stop playing the victim.
Can someone break down the repo market in simple terms, my understanding might be flawed, but basically the banks are running out of physical cash reserves so the repo loan by the Fed to the bank helps shore up those reserves correct? Anyone know where the physical cash is going?
%% I read + reread a bunch on that today. Sounds like the main problems are; 4 or 5 big banks =90% of the problem[ the usual suspects JPM , C,BAC] Dodd Frank,/incented to hold cash/not lend it . Dodd Frank=mostly an overkill to big banks bad behavior. Partly blame the charts....... a 6% spike happened last year also LOL.Bank reserves have been down trending for years ; i noticed @ one community bank[TN] they seemed more hungry than usual for cash deposits. So in addition to to much gov debt ; the banks were incented not to lend smaller cash reserves................................................................................................
I have to admit I don't have a good handle on banking processes (although interesting), a local branch here was short on cash today to my knowledge but that could have been a local problem. If someone with more knowledge can explain please do, but what would happen if there was a massive sell off in the market? Shares are then converted to cash, and then what would happen if there was a huge demand for that cash?
%% I remember in 2008,with the stock market downtrend/bear market , in the news frequently . On a real estate deal, it made the buyer of my farm want to hoard cash for his down payment. And some banks failed then -nothing like the 1930s.So i told the REALTOR we dont need much earnest money @ all- it actually helped ease the buyers mind/ helped close the deal.
There is no market mayhem, wth is the 'repurchase market'? Fed lends money at 2% and privilleged bank isn't lend the money for cheap..in the secondary market. only prime customers or charter banks or billionaires ,millinaairs, or hedge funds with stock assets as 'collateral' can borrow money that cheap okay in 2008, banks were borrowing money using 'WORTHLESS' assset backed bonds to borrow more money,,now if the assets or collateral no longer has value or becomes worthless,,,,you know what. you defautl on your loan and not repaying it back, the bank who lent you money borrowed the money on leverage too... banks borrow money at 2% to lend at 4% or loan shark credit card rates of 20% or 10% that is qauntitative easing ...lending money on credit with no collateral. a bond is just and IOU piece of paper. money is just debt that the gov't owes. or central bank owes. money is a 'receipt of ownership' or debt obligations. cash in theory is same as a gov't bond. if you don't trust the integrity of the gov't or central bank ,it's currency is worth less meaning inflation. these central banks in China is pressured to issue money too and pumpnig a lot of liquidity into their stock market and economy,,you have these ghost cities and deeply in debt gov't companies or state owned companies who won't lay off workers or downsized like a private company . it's gov't controlled economy. when there is no 'free market'