U.S. Fed accepts $756B in daily reverse repo operation

https://www.rollcall.com/2021/06/14/democrats-have-no-easy-o...

Not the first time ever. At least two money market funds "broke the buck" (that is, lost value) in 2008, IIRC.

Panic how? what will they do, withdraw the cash that banks don't want anyway?

I dont undertand the weird mythologizing of 0% interest rate, pretending transaction costa dont exist.

Apparently "ever" covers neither 2008 (where the Lehman Brothers bankruptcy caused the money market to implode) nor 1994, nor 1978.

  Reverse repo is when the Fed loans treasuries to banks, typically at very low rate and no more than one day. This avoids the need for the Fed to sell its short term treasuries on the open market.

i wonder what us the root cause? or in economics, i guess its never so straightforwards...?

Oh man, you left out one of the weirdest ones going on right now! Because of the insanity of the housing market, there are tons of people who close on the house they’re selling a week or more before they close on the house they’re buying and are parking half a million or more in a bank account for a very short duration!

I’ve been in two hotels long-term this spring and both have been filled with people in this situation. They can’t be the only two hotels in the country with people doing this…

When interest rates are 0% there's nothing stopping them from doing this.

I think it's because if the banks have too much cash, that's expensive because it depreciates. They don't want just "mattress money", so when too many people deposit and not enough people withdraw, banks have too much cash, and need a place to park it. If they can't park it anywhere, that means that they don't want more cash, which pushes the interest rates down. Fed has decided that interest rates going down is bad, so they basically say "hey, we'll take the cash off your books, give you a small interest payment for buying the treasuries" and now the banks don't mind taking more cash in.

Basically this is a way of keeping the interest rates higher on deposits, because the banks get subsidized to use that cash to borrow Treasuries, this gets unwound every night. So the banks can operate like they don't have too many deposit liabilities, even though they would without reverse repo.

I think this is a defense against inflation: If banks can't earn anything from cash, that means they have to push out more loans. Loans add risk/leverage (because it's that money creating event) and they also serve to increase monetary supply, causing inflation. Fed has decided that they'd rather control this process instead of leaving it to the free market in hopes that the situation returns to normal instead of causing additional inflation. This could be just kicking the can down the road, but what do I know.

That's not how fractional reserve banking works. If I deposit $100 in a bank, they're not allowed to lend out $1000. In fact given a 10% cash reserve ratio, the limit is actually $90. The other $10 has to stay at the bank "in reserve", at least in theory. (In practice there's additional complexity because banks can borrow money to fulfill their reserve requirements.)

When people talk about money creation from fractional reserve banking, what they mean is that someone has $90 from the loan and someone else has $100. Which sums to $190: more than the initial deposit.

This is the clearest overview of the process I've ever come across, and it's from the Bank of England who should know how :)

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

There's another one covering money more generally as well.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

Fractional reserve banking is a myth. All deposits come from banks making loans. They are the balancing item on the balance sheet. Banks make loans until they run out of creditworthy customers prepared to pay the current price of money.

However government payments effectively force banks to make loans to the Fed on terms dictated by the Fed.

All a reverse repo is, is the Fed offering alternative terms for that loan for a day.

Current headlines use the broad statistics, such as the most exclusive unemployment stats, that don't really capture what's happening on Main Street.

The reporting on the economy barely pokes at issues and are generally just looking for general correlations, such as "Stocks do X as Y does that," or "GDP is doing X while Y is doing Z."

The thing is is your average American would never even consider the ultimate possibility of a foundational collapse of their economy and currency.

And it's not just the average American. Nearly all hedge funds etc have USD as their basis.

Bitcoin, Gold, Stocks, real estate etc has a value tag that's denominated in Dollars.

You open up your portfolio and be happy when the USD value goes up in a nice green color.

But what happens when USD gets diluted and debased so much that it's not possible to stop anymore. Are we not past point of no return already?

Debasement of currency marked the end of the Roman empire, why would American empire be any different?

Because US has nukes?

Because they can force the rest of the world to keep using USD at gunpoint?

For how long?

The FED is sitting on trillions of taxpayer bailout money from the CARES Act, yet if you took about 1/8th of that money, government could wipe the entire student loan debt, but then you’d hear the media talking point screaming how we can’t afford it.

opinion - feels - seems ?

Do you have any sources for your unpopular opinion?

tl;dw: too much money in the system, big banks don't want the liability, push it to money market funds which use short term treasury while treasury is trying to increase their long term debt and reduce the short term ones. essentially, not as scary as it sounds.

But more than likely you need to understand what Reverse Repo is and why it impacts all of us. Here's a great ELI5 On Reddit.

https://www.reddit.com/r/investing/comments/1ixbwf/eli5_repo...

TLDR: More inflation and shakey times ahead.

[0] What is a repo? - https://www.richmondfed.org/publications/research/econ_focus...

[1] Repos in charts - https://fred.stlouisfed.org/series/RRPONTSYD

This relates to scarcity of short-duration treasuries, it's mostly a scary sounding non-event

In more concrete terms, banks (i.e. members of the Federal Reserve System) keep USD reserves on deposit at the Fed. The only thing they can do with these reserves is loan them overnight to other member banks at a market-determined interest rate--the Federal Funds Rate--which is targeted to a certain range by the Fed's policymaking committee. The Fed also pays interest on these reserves, at two rates: one rate for required reserves, and another for excess reserves. These serve to put a floor under the FFR, since there is no reason to lend reserves at a rate below what you can get by just sitting on them.

Of note is the fact that only Fed member banks have access to this, so other financial institutions must go through the banks when they have excess cash to park somewhere. In essence, the bank can accept overnight cash from non-banks and split the IOER with them. This transaction is consummated through a repurchase agreement (repo) in which the bank sells a "safe" asset to the counterparty with an agreement to buy it back soon thereafter (often overnight, but potentially up to a year later) for a slightly elevated price. The price difference is effectively the counterparty's cut of the IOER accrued during the time that the bank was sitting on the cash. Repo transactions are used for all sorts of short-term funding needs among non-banks, so the overnight rate on high-quality repo is roughly equivalent to the FFR.

It is for this reason that the Fed started its reverse repo operation, whereby it offers basically the same deal that I described above to certain qualified non-bank counterparties, in order to set a floor on overnight repo rates. (You can ignore the "reverse" in the name; it just means that the Fed is the one lending securities in the transaction.) The Fed is extremely wary of negative interest rates and the effect they might have on market behavior, so reverse repo appears to be the preferred method for preventing this.

So what does it mean when usage of this facility skyrockets? Well, it means that banks are not willing to engage in overnight repo at the rate that the Fed is offering, which in turn means that there is suddenly a large imbalance between repo supply (high-quality lendable securities held by banks) and demand (idle cash held by non-banks). As to what that fact means for the near future, opinions may differ sharply.

Banks essentially make money by arbitraging time preferences--they borrow short term (e.g. demand deposits which can be withdrawn at any time) at very low interest rates, and lend long term for much higher rates to risky ventures. They realize a profit by earning a sufficient spread between these rates to offset losses due to counterparty risk (i.e. default) on their lending. One consequence of this model is that a bank may abruptly become insolvent due to short term market conditions, if it cannot roll over its sources of funding. Since financial assets can typically be liquidated quickly (as opposed to, say, a bunch of idle factories owned by a defunct manufacturer) this can lead to systemic instability when an insolvent bank is forced to sell everything and drags down the prices for assets held on other banks' balance sheets.

After the GFC, regulators decided to come up with a more nuanced set of rules about how "healthy" a large bank's balance sheet must be, in order to spot trouble before it exacerbates a liquidity crisis and produces a solvency crisis. A business's leverage ratio is basically capital (equity) divided by assets (or its inverse, depending on your framing). For banks, however, just looking at leverage is not that helpful since the assets being held have very different levels of risk. The new metric is the Supplemental Leverage Ratio (SLR), which includes off-balance sheet exposure. Notably, the bank's reserves at the Fed as well as holdings of US Treasuries are normally included in the denominator (risk assets), but at the start of the pandemic an exemption was put in place so these could be excluded, thereby boosting the leverage ratio and allowing banks to engage in more lending than would otherwise be allowed by the normal SLR calculation.

However, the SLR exemption has now been allowed to expire, and thus banks must tighten up their balance sheets to avoid the severe restrictions of a low SLR. We are now squeezed between the Scylla and Charybdis of financial regulation and monetary stimulus, as the Fed engages in QE to encourage lending towards riskier economic activity while simultaneously imposing leverage constraints to prevent large banks from posing systemic risks. The Fed's reverse repo has become the pressure release valve, as banks are completely hamstrung by their inability to offer negative rates so everyone is now going straight to the Fed for their overnight deposits.

Ironically, this is essentially a (short-term) negation of the Fed's QE activity, as the Fed is simultaneously purchasing assets as well as lending them out on an ongoing basis. In other words, the market is sending a pretty clear signal that QE is really unnecessary at this point in time.

Financial Institutions put collateral into an overnight market and receive cash, and then they "agree" to "repurchase" / give the cash back (plus some fee) for the collateral the next day - right?

This is the "opposite" in that Financial Institutions put cash in and get collateral (treasuries) out - right? The transaction is essentially going in the "reverse" direction it traditionally went - which is why it's the "reverse repo market".

It's interesting because "having too much cash" is not usually a problem. Now it is.

If people start spending money again things will go back to normal. The hope is that the pandemic makes people realize that money is not a perfect risk free asset that you can hold onto forever.