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New York Fed Again Upsizes Liquidity Plans for Turn of the Year

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Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#81

Post by PeterStuer »

samsolomon wrote: post #65
apacheCamel wrote: post #55

Earlier quoted context omitted.

Why would the Fed allow this? Who created the regulation saying they needed a threshold and why aren't they putting more teeth into it? It seems silly to me to have a regulation without proper enforcement and it seems insane to me that the Fed is complicit.

I'm also interested why the FED would want to do this. Could it be to maintain interest rates at a certain target? If the banks don't have money to lend, would it cause them to charge higher interest on their loans?

Banks don't actually need money to lend money. They just create a loaned amount credit in one account and a corresponding asset consisting of a future revenue stream on the other side.

The cash reserve is just a collateral against the risk, needed to stabilize public trust they will not default at the slightest ill wind.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#82

Post by PeterStuer »

joncrane wrote: post #80
PeterStuer wrote: post #35

In case like me you wondered "Why would anyone need money overnight? (or just for a second, actually)" EDIT: As the commenter below points out, it is actually over very short periods to even out a 2 week average period, but the mechanic is indeed as explained AFAIK the "overnight loans" are a vehicle to dodge the reserve requirements for banks. In theory the bank is not allowed to fall below a certain reserve thresho…

It's actually measured as an average over a two-week period. Unsurprisingly, lending and borrowing activity is highest on the last day of the measurement period. Generally speaking, banks try to maintain a steady reserve ratio over the whole period, but there's some wiggle room to play it a little loose and just borrow a lot on the last 1 or 2 days of the measurement period. Source: I used to work at the Fed and stud…

Thank you for the extra clarification.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#83

Post by powowow »

thisisnotmyname wrote: post #61
cheald wrote: post #38

Earlier quoted context omitted.

The point, more broadly, is that these are loans with a quick expiry baked in. The money comes into and poofs out of existence on a relatively short timescale (ranging from overnight to a couple of weeks); we aren't going to see an extra ~$3T in circulation. They're providing lubrication in the repo markets, they aren't just shoveling cash into the banks' vaults. Most people misunderstand this point when discussing r…

What happens if banks systematically are unable to pay these loans back?

The fed holds US treasury bonds as collateral.

Would you be worried about default if you loaned me a million dollars, and I gave you a million dollars of treasuries as collateral?

It blows my mind that people are getting all worried about fully collateralized short term interbank lending.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#84

Post by deusofnull »

resters wrote: post #24

This stuff is normal. It is not a signal. I do think there will be a crash similar to 2008, but this is not evidence that it is coming.

> I do think there will be a crash similar to 2008, but this is not evidence that it is coming.

i agree but i lack a specific metric or analysis that supports my thinking. do you have one?

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#85

Post by jstewartmobile »

AnimalMuppet wrote: post #49
jstewartmobile wrote: post #40

Earlier quoted context omitted.

If it is propaganda, who does it serve? And BTW, where's my $120B overnight loan?

It serves those who wish to paint the Fed as totally irresponsibly flooding money into financial assets. Why? Because they think it serves whatever axe they have to grind. Anti-Wall-Street? Anti-Fed? I suspect the former, given the publication, but I'm not sure. Where's your $120B overnight loan? Well, I'm pretty sure these loans aren't free. Where's your $7 million to pay the interest? [Edit: And even if you have $7…

If I invest poorly, and have to eat $7M + losses, no.

If I invest poorly, and get a temporary bail-out until my investments pan out, I'd still like that $120B please.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#86

Post by joncrane »

JumpCrisscross wrote: post #9
jdhn wrote: post #3

Ever since this whole repo issue started, we've been told that the ever incresing sums of money that are put into the system are just a "short term" thing, yet no end date is ever announced. Not to mention that the actual cause for the spike in repo rates has never been announced or identified.

> we've been told that the ever incresing sums of money that are put into the system are just a "short term" thing, yet no end date is ever announced Short-term as in short-term financing, i.e. overnight lending. Nobody expects repo to go away in the same way nobody expects interest paid on excess reserves to go away. It's a tool the Fed uses to manage the money markets. Because the Fed is the Fed, it's almost alway…

>Because the Fed is the Fed, it's almost alway going to be the cheapest counterparty to borrow from.

Wrong. It used to be this way but they switched it up in 2003.[1]

The Fed is considered the "lender of last resort" and they manipulate the interest rates to keep it that way.

They used to target the Fed Funds rate to be higher than the discount rate. But that didn't make sense if you think about the system the government wanted (for a while it was thought that embarrassment/the risk of increased oversight was enough of a barrier that the lower rate was OK).

1. https://datawrapper.dwcdn.net/0jhQV/4/

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#87

Post by joncrane »

deusofnull wrote: post #84
resters wrote: post #24

This stuff is normal. It is not a signal. I do think there will be a crash similar to 2008, but this is not evidence that it is coming.

> I do think there will be a crash similar to 2008, but this is not evidence that it is coming. i agree but i lack a specific metric or analysis that supports my thinking. do you have one?

Inversion of the yield curve was probably the best signal, but that reversed itself.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#88

Post by snarf21 »

AnimalMuppet wrote: post #16

> The $2.93 trillion that the New York Fed will funnel to Wall Street over the next month consists of up to $120 billion each weekday in overnight loans through January 14 and $440 billion in term loans ranging from 3-days to 32 days. We're talking about an overnight loan of $120 billion (that is, a loan that is paid back the next morning, lent again the next night, paid back in the morning, etc. This article is trea…

Everyone should go listen to Bloomberg's Odd Lots podcast. They have lots of recent episodes that dive into repo markets very clearly.

tl;dr Banks have money in the Fed that they normally loan each other over night. This is mostly money they are keeping in reserve. At quarterly period ends, taxes and other payments are due so the big banks can't provide the same amount of repo loans so the Fed steps in to do the lending instead. Non story, click bait.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#89

Post by jklein11 »

PeterStuer wrote: post #35

In case like me you wondered "Why would anyone need money overnight? (or just for a second, actually)" EDIT: As the commenter below points out, it is actually over very short periods to even out a 2 week average period, but the mechanic is indeed as explained AFAIK the "overnight loans" are a vehicle to dodge the reserve requirements for banks. In theory the bank is not allowed to fall below a certain reserve thresho…

I am by no means an expert but I thought these repurchase agreements served a different purpose.

Lets say that you are Lerrill Mynch. You have 2 clients, today client 1 has $10,000 in AAPL and client 2 has $10,000 in cash. Client 1 decides to sell $10,000 in AAPL and Client 2 decides to buy $10,000 in Ford. You go to the market and find that Soldman Gachs has a client that wants to buy $10,000 in AAPL and MP Jorgan has a client looking to sell $10,000 in Ford. Everyone agrees and everything is happy.

Overnight Lerrill Mynch needs to makes sure that Soldman Gachs gets the 10k, Client 1 gets the shares in the security, MP Jorgan gets the 10k and Client 2 gets the Ford shares. In order to make sure that this whole transaction clears, Lerrill Mynch has to make sure that they have enough cash to cover the transaction.

Re: New York Fed Again Upsizes Liquidity Plans for Turn of the Year

#90

Post by MichaelConlon »

PeterStuer wrote: post #76
quickthrowman wrote: post #67

Earlier quoted context omitted.

The banks have assets that are worth money they can post as collateral to borrow the cash to meet reserve requirements. Or would you rather have banks unloading massive stacks of treasuries at market close daily to meet their cash needs, creating volatility in bond markets? Repo lending means banks don’t have to unwind their positions daily due to a cash shortage, because they have other assets they can post as colla…

Tell me: Why was the cash reserve regulation introduced? What problem did it address? Why, if banks are not able to comply with this regulation without "unloading massive stacks of treasuries at market close daily", are they allowed to load up on "massive stacks of treasuries" flaunting the cash reserve regulation in the first place?

The cash reserve system was introduced to protect against a 1920's style bank run. The idea being that a bank should have enough liquid assets to cover 10 or 15% of their customers pulling all of their deposited funds out of the bank.

The goal of a bank is to make as much money as it can with it's assets. It's in the banks interest to loan out as much as it safely can while staying above the reserve requirements. If a bank were to dump it's assets to ensure it met reserve requirements it would likely sell at firesale prices which could drive down the price of those assets for the rest of the market. By taking a loan from the Fed and using those assets as collateral that scenario is avoided. It's also worth noting that these loans are not free, the Fed does charge interest.

So the bank avoids dipping below reserve requirements (and flooding the asset market) and the Fed earns a small amount of interest.

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