Repo madness hits Wall Street

CNBC’s Steve Liesman looks at the Fed’s balance sheet and parses the ‘repo madness’ that hit Wall Street.

Big banks and hedge funds helped fuel disruptions in the overnight lending markets a few months ago that continue to pose a threat to the financial system, according to a Bank for International Settlements analysis.

A mid-September cash crunch led to a spike in very short-term rates in the repo markets, where banks exchange high-quality collateral for cash with an agreement to buy back those assets with interest. Repo is the essential plumbing for banks to conduct their operations.

Federal Reserve officials have attributed the problem to a rush of corporate tax payments and settlement for an unusually large settlement in Treasury bond auctions.

However, the BIS said that while those two factors help explain some of the problems, they fall short of a full accounting.

“None of these temporary factors can fully explain the exceptional jump in repo rates,” the bank wrote.

Other factors the institution cited include the heavy reliance on the “Big Four” banks for funding, the increased role that hedge funds are playing on the demand side for funding, and the adjustments that market participants are making following an extended period of ample reserves that has changed over the past two years.

“Cash balances held by the US Treasury in its Federal Reserve account … grew in size and became more volatile, especially after 2015,” the BIS added. “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.”

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19 thoughts on “Repo madness hits Wall Street”

  1. The system died in 08. QE has been going on since 08 and hasn't stopped since. If the FED stops QE it's game over.

  2. They didn't lend because there is no risk to the stock market losing money.Therefore all money from the fed is used to buy stocks

  3. Hedge funds needed badly overnight funding. This will end badly but the fed and the big Bank like JP Morgan are diverting attention from this. Hyperinflation is on its way because it will be QE forever and no ceiling to the repo intervention

  4. The World Through My Mind

    CNBC is sooo superficial. What B.S. is this ? It is still going on and strong. The problem is becoming worse, not better. Not a one day event here gents!

  5. Mikhail Kalashnikov

    Ladies and gents, please return to your seats, place your seat-back trays in their full upright position, fasten seat belts and brace for impact.

  6. The Fed nationalized the repo market, there is no way out now, interest rates can never be normalized and the balance sheet can never be reduced, the Fed will eventually have to buy every asset.

  7. Repo are nothing. that means our bank are now on adrenaline; being backed up by the Feds and our economy are Going all the way up. just like Adam Khoo of piranah trading predict. News media are just Bu*Sh*

  8. Wait until all the oil companies loans come due.. almost all of them are in debt up to their ears and no way to pay it back. We have tremendous amounts of oil keeping prices low and renewable energy is now cheaper.. also most of the corperations are in debt too and with all of this compounding one thing on top of the next .. This will be a depression not a recession.

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