Statement Regarding Repurchase Operations

Post by diminoten » Fri, Sep 20, 2019, 6:02 PM UTC

LocalTrust wrote: post #9

Wow this is not good. Repo market is the market of overnight debt between banks. Banks lend money to each other to cover their collateral needs/exposures at the end of each day. If banks lose confidence in each other, they start demanding more collateral from each other in the overnight market, which means the overnight rate goes up. The NYFed is trying to keep interest rates down and is having trouble doing it. As a…

Post by [deleted] » Fri, Sep 20, 2019, 6:02 PM UTC

SilasX wrote: post #39

toomuchtodo wrote: post #15

Earlier quoted context omitted.

It’s to prevent a cascading failure due to a rapid loss in confidence requiring even greater action from the Fed (such would occur if interbank lending dries up because of counterparty risk [perceived or actual]). Disclaimer: I work in financial services, but am not involved in these operations.

So, banks don't trust each other's collateral, but the Fed does, and that judgment is more correct?

Post by hsnewman » Fri, Sep 20, 2019, 6:04 PM UTC

opportune wrote: post #25

spiantino wrote: post #19

Earlier quoted context omitted.

I don't think that's whats happening. Basically, in a repo you have one party posting a treasury bond as collateral and being lent the equivalent amount of cash. There's an interest rate you're charged on the cash, and potentially a "haircut" on the amount of cash relative to the value of the bond that a bank might take if they decide the other party is a risk and they want more collateral posted. What you're describ…

Why is there such a liquidity crunch though? And why is the fed stepping in when the liquidity crunch could just correct itself via market mechanisms - if the market rate for overnight lending was 9% I assume plenty of organizations would race to take advantage of that Aside from something that would just naturally correct itself (lenders being temporarily short on cash due to some statistical anomaly), the only expl…

Post by rwmurrayVT » Fri, Sep 20, 2019, 6:05 PM UTC

diminoten wrote: post #41

LocalTrust wrote: post #9

Wow this is not good. Repo market is the market of overnight debt between banks. Banks lend money to each other to cover their collateral needs/exposures at the end of each day. If banks lose confidence in each other, they start demanding more collateral from each other in the overnight market, which means the overnight rate goes up. The NYFed is trying to keep interest rates down and is having trouble doing it. As a…

30 days * $100 billion = 3 trillion dollars. Wat. Seriously, can someone explain what that actually means? Surely there isn't literally 3 trillion dollars moving around...

Post by disiplus » Fri, Sep 20, 2019, 6:09 PM UTC

toomuchtodo wrote: post #18

tracer4201 wrote: post #17

Earlier quoted context omitted.

I vaguely remember my macroecon class in college so many moons ago. The point is to stop a “contagion” from spreading and causing panic, right?

Essentially. Read about the 2007-2008 GFC [1] to understand how fast the system can break down (weeks). Personally, I find the story of how JP Morgan (the financier) first acted as this sort of national economic backstop in 1907 very interesting and a fun read [2]. [1] https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80... [2] https://en.wikipedia.org/wiki/Panic_of_1907