Repo: How Roughly $1 Trillion Moves Overnight | WSJ

Repo: How Roughly $1 Trillion Moves Overnight | WSJ


(pleasant mallet percussion music) – [Narrator] Take a look at this chart. It tracks how much banks and
others pay for overnight loans using something called
repurchase agreements. This is also known as the repo rate. These bumps right here on
September 16th and 17th have caused a really big
stir in the financial world. That’s because the repo
market is a critical part of the financial system. It provides a lot of the grease that keeps the wheels spinning, meaning it provides the cash
that financial firms need to run their daily operations. When the repo market chokes
and cash stops flowing, trouble can reverberate
through the economy. That’s what happened in September, and in response, the Federal
Reserve had to step in to help, providing tens of billions
of dollars to borrowers to keep the system cranking. In the weeks since this happened, experts have called the incident
a technical malfunction, and banks, for their part, have said it could have been prevented. They’re blaming the rules
that were put in place after the financial crisis, rules intended to keep the banking system from falling apart. (dramatic mallet percussion music) (pleasant mallet percussion music) Imagine two people, Karen and Mark. Karen has $1000 and she’d like to earn some fast interest on her money. Mark has a stack of
treasury notes but no cash, so he strikes a deal with Karen. One note for $100, but there’s a catch. Mark has to agree to buy that
note back tomorrow for $101. The difference between
the price of the note on day one and day two,
that’s the repo rate. If everything works properly, Mark gets the cash he needs
right when he needs it and Karen makes some fast money. The repo market functions in the same way. You just have to replace the
Karens with money market funds and other asset managers who are looking to make a little money
without a lot of risk and replace the Marks with hedge funds, Wall Street traders, and
banks who have a lot of assets but need cash on hand to fund
their day-to-day trading. In the repo market, Karens and Marks all over the financial
system lend back and forth for short periods, often overnight, and they do this at an enormous scale. Usually, more than $1 trillion
runs through it every day. On September 16th and
17th when the rate spiked, the Karens were not willing
to trade cash for securities at the usual rate, so
the Marks who needed cash kept offering more and more and more until the Fed arrived with help. (pleasant mallet percussion music) When the Fed announced its
surprise repo operations, people wanted to know, why did the Karens suddenly stop lending? Experts point to two financial deadlines that sapped cash out of the
system on the same night, causing a crunch.
(gears snapping) September 16th was the cut-off for banks to submit their quarterly tax payments, so a lot of money that
they might usually lend in the repo market was being
sucked out of their accounts and deposited into the Treasury. September 16th was also the day that $78 billion of Treasury
debt was scheduled to settle, which just means that
another chunk of cash was being turned into
securities on that day, too. Now, some banks said the
crunch was compounded by another factor, a rule put in place after the financial crisis
to keep banks solvent. The rule, which is called
Liquidity Coverage Ratio, or LCR, requires banks to keep a
certain amount of reserves or cash on hold at the Fed at
all times, among other things. The idea was to improve the
banking sector’s ability to absorb shocks arising from
financial and economic stress. You can see it on this chart. Since the crisis, banks have stockpiled cash
in their reserve accounts. There argument is that
keeping these funds on hold makes it harder for them
to lend out cash on a dime when money gets tight. Now, for the Fed’s part,
Chairman Jerome Powell dismissed the possibility
of revisiting those rules. – If we concluded that we
needed to raise the level of required reserves for
banks to meet the LCR, we’d probably raise the level of reserves rather than lower the LCR. – [Narrator] What he’s
saying is that the Fed would rather provide
the extra funds itself than lower those liquidity
requirements for banks, and since that press conference, the Fed’s done just that. In October, it announced
it would start buying short-term treasury debt
at $60 billion a month and continue through
at least June of 2020, which means there’s
gonna be money to borrow even if the Karens stop lending again. Its aim is to boost reserves, allowing banks to stay liquid
without violating the rule, and in doing so, to keep the wheels of the financial system spinning.

100 thoughts on “Repo: How Roughly $1 Trillion Moves Overnight | WSJ

  1. Question (for myself a newbie, go easy on me).. Would the cash reserves the banks are forced to hold by law ever match or come close to the amount borrowed in these short term "overnight" loans?

  2. I don't think the repo hiccup is being caused by the "regulated" bank market… I think the liquidity crunch is being caused by the shadow banking market… who is front-running the market on dropping interest and anticipating QE.

  3. So, the Fed stepped in to fill Karen's (Money Market Funds, Asset Managers) shoes and do something that Karen is currently unwilling to do, but something that she used to make a bit of money at, which was overnight lending to Mark (Banks, Hedge Banks, Traders). My question is, is the Fed actually making money on this, like Karen did? Is Mark paying the Fed back with interest every day or do they plan to in the future? In other words, are they really filling Karen's role, or are they doing something else entirely and handing out gifts instead of loans? Can you explain if the Fed gets the money back?

  4. How convenient when a whole industry has a specially dedicated government entity to bail them out every time they need it… Socialism for the rich.

  5. You will be throwing yourself of a cliff once you find out what these scumbags have in store for us. Buy bitcoin and hold physical assets.

  6. What the Fed's doing is kind of weird, but I think it's better for the banks to keep that cash in reserve rather than using it for repos. It may hurt their bottom line, but if it makes the financial system more resilient against shocks, it's worth it. Who knows when the next shock will happen and where it'll originate from (unfortunately, it is a "when" and not an "if")?

  7. I'd be willing to bet that the fed wants to provide the funds themselves because those reserve accounts are empty.

  8. It's not 60 BILLION out of thin air a month it's a DAY. After first day the got 60 something BILLION. Next DAY another 65 or something. And it's been going on most of the month that's what I heard

  9. $60B / month, try $90B – $130B / day. Hyper inflation anyone? Anyone auditing the Fed to make sure the banks buy back the paper?

  10. I don’t know where to begin DUH! Go back to sleep nothing to see here. Karen’s money isn’t money it’s fiat currency based on hope. Trade hope for real money like silver.

  11. Everything is fine. Its only one or two insolvent banks with a risk of default so high that no other bank would lend money to for a period of 24 hrs. Keep swiping those credit cards folks, Christmas is just around the corner.

  12. I hope the whole thing collapses and all the bankers go broke tbh. If the government helped the people who actually need it rather then helping these greedy men it would be a better world

  13. That is a lie.
    REPO is indeed caused by a Bankrun of big accounts happening right NOW!
    People will have a haircut on their deposit as history repeats itself.

  14. If a $100 note is bought back in one day for $101, that's not a 1% annualized rate, that's a 365% rate. A 1% annualized is more $100.00274. Please get your math right.

  15. Did the fed need to step in? There's plenty of Karens on Main St willing to lend overnight at an interest rate of 50%.

  16. LCR is good… It prevents banks from going insolvent overnight and protects depositers. The people who are blaming Obama's LCR want to go back to 2008 when depositers lost all their money.

  17. The excuses don't explain why the Fed has needed to extend their overnight repo operation from originally a few days to the end of January 2020 (4.5 months).

  18. Securities weren't physically exchanged in the overnight market, so banks were having to trust other banks when they claimed to have those securities or that they weren't also fraudulently pledging them in other repurchase agreements with other banks. Did some banks catch on and is that why the rate went to 10% before the Fed jumped in? When are we going to get the truth?

  19. The Fed is all smoke and mirrors to manipulate everything that they come in to contact with. You can bet that they are trying to put out some serious fires.

  20. That is such an over-simplistic explanation that does not mention so many other things like fractional reserve banking that would put this all in perspective. And another very important factor is that of the theft mentioned were the treasury takes a certain cut by the pronouncement of these lawyers called legislators telling you how much you must give them to misspend and make them rich, you poor, effects this whole story. If the banks have all the money, then who owns the politicians? If everything you own including yourself, is valued in terms of a fiat currency, then what value is property?

  21. What a load of BS these ostrich head in the sand money mongers knew when quarterly tax payment would be but still acted on their lending agreements cause hey business needs money, And even if they acted out not to know its still BS. So they gladly rub their hands together when sugar daddy Federal Reserves comes to intervene for business as usual. Right right.

  22. "Why did Karens stop lending?"

    -Because Karens are smart. Karens know exactly what the "real world" repo rate should be (read: the banks acted like a drunken sailors who so far never get arrested)

  23. WSJ, just another msm publication with a carefully crafted narrative to narrowly avoid pointing the blame where it belongs. None of this would have happened without such weak reserve requirements, taking the dollar off the gold standard, and having the fed occlude the markets’ wishes with fiscal and money policies that create this decade long business cycles. Every time the bubble pops the rich get richer. They are just storing energy behind a horrible rubber band by dragging this out, we need a currency reset and to get rid of the Fed

  24. Just another way to explain QE which never stopped. Feds buy stocks and prop the market plain and simple. Funniest part of the whole thing is banks hold cash. Hilarious.

  25. When comes the Apocalypse
    Savages + their dogs …will eat the Bankers

    Meat is Meat …Bankers have no empathy …they should expect none

  26. The banks have to pay tax every quarter so it’s not as if this was a surprise for them….the surprise lack of liquidity must’ve come from another source…or perhaps the supply was normal and the demand was outsized (?)….

  27. A maddening swindlers game created to extract wealth from the masses and transfer it to the banks. It's meant to be uninterpretable.

  28. You just described a porn-shop. Payday loans etc. here’s the thing: banks are risky at this stage of the credit cycle. Therefore, risk is priced accordingly.
    Solution. Stop manipulating the markets government and let the inevitable collapse happen.

  29. 3:30 – Notice this video doesnt mention HOW MUCH banks are required to keep on hand for solvency. Its not very much. If people knew how little, they probably wouldnt want to put their money in banks in the first place.

    The fact that banks needed to go to the FED for temporary loans to meet the solvency requirement is evidence of how much capital loss they are hiding. Pretty soon we will have many more situations like The Lehman Brothers Bank scandal where they were reporting $41b in assets when they actually had $2b and were constantly borrowing money to hide the losses.

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