US Repo Limits Increased to Boost Bank Reserves

Author: Corey McDowell - Economics Editor

Published: 6 Mar 2020

Last Updated: 9 Mar 2020

Contents

Whilst all the news last week was about new government spending commitments and fresh interest rate cuts brought on by the dangers of coronavirus, rising levels of repurchase agreements (repos) issued in the United States seem to have missed by most economic analysts. Policymakers began intervening in money markets again when a shortage of reserves in banks led to a spike in short-term borrowing rates.  

On the 5th March, $159.9 billion was submitted, of which $107.36 billion was accepted. This has prompted the US Fed to increase the daily overnight repo operations by 50% to $150 billion and the two-week operations on the 10th march and 12th March will rise to $45 billion from $20 billion.  

These figures show there are serious liquidity issues in the American banking system. With the supposed economic recovery over the last decade being built on spiralling debt, the threat of defaults has grown massively with these numbers. Perhaps commercial and banking payment failures are beginning to bite, the cause of which could be pinned on the rapidly increasing fallout caused by the coronavirus outbreak. However, warning signs have been around since September of last year, when repo rates began to overheat. With current events now moving at a quickening pace, it could be another worsening problem which US policymakers find themselves having to deal with.

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