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Wow this is not good. Repo market is the market of overnight debt between banks. Banks lend money to each other to cover their collateral needs/exposures at the

Wow this is not good. Repo market is the market of overnight debt between banks. Banks lend money to each other to cover their collateral needs/exposures at the end of each day. If banks lose confidence in each other, they start demanding more collateral from each other in the overnight market, which means the overnight rate goes up. The NYFed is trying to keep interest rates down and is having trouble doing it. As a result, it's having to take some extraordinary measures to the tune of injecting $100b into banks, every night, for the next month. They are basically trying to ensure that no bank gets caught with it's shirt off, while the banks are signaling that they think their peers might be naked.

spiantino 7y ago
I don't think that's whats happening. Basically, in a repo you have one party posting a treasury bond as collateral and being lent the equivalent amount of cash. There's an interest rate you're charged on the cash, and potentially a "haircut" on the amount of cash relative to the value of the bond that a bank might take if they decide the other party is a risk and they want more collateral posted. What you're describing is an increase in "haircuts" in these transactions between banks, but I haven't heard anyone report that has been happening. It has been, more simply, that too many people are showing up with bonds and want cash and too few people are showing up with cash and want to lend it. So the interest rate has risen
- opportune 7y ago
  Why is there such a liquidity crunch though? And why is the fed stepping in when the liquidity crunch could just correct itself via market mechanisms - if the market rate for overnight lending was 9% I assume plenty of organizations would race to take advantage of that Aside from something that would just naturally correct itself (lenders being temporarily short on cash due to some statistical anomaly), the only explanation I can think of is that some of the lenders believe that some of the creditors are about to default
  - karpodiem 7y ago
    Shades of LTCM.
  - holy_city 7y ago
    (not a finance guy) - what I was told when the Fed did this on Monday/Tuesday was that there was a perfect storm where businesses had way more withdrawals from their accounts than deposits (taxes + payroll iirc) which led to a situation where banks didn't have the cash on hand for the repo market and minimum balance required by statute. But that doesn't explain why the Fed is doing this over the next few weeks. No idea how accurate that is as a characterization, so someone help out via Cunningham's Law.
    - opportune 7y ago
      That makes some sense as Monday was the deadline for Q3 federal taxes. However this should of course be something that is expected and factored into banking operations so there must be some other factor no?
  - yasp 7y ago
    Supply inelasticity. https://news.ycombinator.com/item?id=21028982 https://news.ycombinator.com/item?id=21028982
  - hsnewman 7y ago
    I read that the cause was that companies were taking money out to pay their quarterly taxes.
    - ajmurmann 7y ago
      Wouldn’t that be a regular occurrence and thus non-news? Is everyone looking for recession fear mongering material?
      - hn_throwaway_99 7y ago
        The headline says they're conducting repo operations until Oct 10 which is 3 weeks out, so obviously it's something more that just quarterly tax payments.
- ajross 7y ago
  Aren't the haircuts and interest rates just flip sides of the same coin, though? You can express risk in either language, and if either is rising that means that the evaluation of risk has risen too. I don't know that this really makes me personally feel better.
- LocalTrust 7y ago
  You’re right. Thanks for this comment. It’s really helpful. I’m still wondering what the factors are that created this gap. If financial institutions aren’t losing confidence in each other or the assets that are been posting as collateral, why is there a cash shortage in the overnight market?
diminoten 7y ago
30 days * $100 billion = 3 trillion dollars. Wat. Seriously, can someone explain what that actually means? Surely there isn't literally 3 trillion dollars moving around...
- somebodythere 7y ago
  75 billion dollar loans, repaid the next day, for 20 days.
- rwmurrayVT 7y ago
  It's 'overnight'. Theoretically the same "atleast $75b" could be used daily.
  - diminoten 7y ago
    Thanks. Guess asking a genuine question on HN isn't okay, judging by the downvotes..
perseusprime11 7y ago
Isn't this just an overnight loan?
jVinc 7y ago
So in that situation, the banks are basically in a position where raising their rates (which earns them more) will lead to the feds covering more and more of that? What's to stop them from collectively playing chicken against the feds, while shoveling money into the bag until it becomes ridicules? I mean normally I'd expect a business being close to bankruptcy being told by an investor "This simply cannot happen, I will inject money indiscriminately until you float!!" will start looking for money dumps like buying verbs from CEO's, not opportunities to actually bring the business back in good standing.
- dpc_pw 7y ago
  What you've described is already happening, just on a global scale. For 10 or more years, whole financial system is just pushing slowly and collectively the lever, knowing that central banks will not allow it to collapse. So as long, as you're not outstandingly fragile, and instead your collapse would mean a collapse of most of similar financial agents, you can always push your risk a little bit higher, forcing your competition to the same.
  - beamatronic 7y ago
    So, where should we put our money?
    - n-exploit 7y ago
      Decentralized currencies.
arez 7y ago
nobody is loosing trust, where are you getting that from? There's just not enough cash at hand so the fed is injecting some. People see doomsday scenarios where there is none
adrr 7y ago
They are screwing over some of the fintechs that provide banking services and use overnight lending to make money on the deposits.

spiantino 7y ago

I don't think that's whats happening. Basically, in a repo you have one party posting a treasury bond as collateral and being lent the equivalent amount of cash. There's an interest rate you're charged on the cash, and potentially a "haircut" on the amount of cash relative to the value of the bond that a bank might take if they decide the other party is a risk and they want more collateral posted. What you're describing is an increase in "haircuts" in these transactions between banks, but I haven't heard anyone report that has been happening. It has been, more simply, that too many people are showing up with bonds and want cash and too few people are showing up with cash and want to lend it. So the interest rate has risen

opportune 7y ago
Why is there such a liquidity crunch though? And why is the fed stepping in when the liquidity crunch could just correct itself via market mechanisms - if the market rate for overnight lending was 9% I assume plenty of organizations would race to take advantage of that Aside from something that would just naturally correct itself (lenders being temporarily short on cash due to some statistical anomaly), the only explanation I can think of is that some of the lenders believe that some of the creditors are about to default
- karpodiem 7y ago
  Shades of LTCM.
- holy_city 7y ago
  (not a finance guy) - what I was told when the Fed did this on Monday/Tuesday was that there was a perfect storm where businesses had way more withdrawals from their accounts than deposits (taxes + payroll iirc) which led to a situation where banks didn't have the cash on hand for the repo market and minimum balance required by statute. But that doesn't explain why the Fed is doing this over the next few weeks. No idea how accurate that is as a characterization, so someone help out via Cunningham's Law.
  - opportune 7y ago
    That makes some sense as Monday was the deadline for Q3 federal taxes. However this should of course be something that is expected and factored into banking operations so there must be some other factor no?
- yasp 7y ago
  Supply inelasticity. https://news.ycombinator.com/item?id=21028982 https://news.ycombinator.com/item?id=21028982
- hsnewman 7y ago
  I read that the cause was that companies were taking money out to pay their quarterly taxes.
  - ajmurmann 7y ago
    Wouldn’t that be a regular occurrence and thus non-news? Is everyone looking for recession fear mongering material?
    - hn_throwaway_99 7y ago
      The headline says they're conducting repo operations until Oct 10 which is 3 weeks out, so obviously it's something more that just quarterly tax payments.
ajross 7y ago
Aren't the haircuts and interest rates just flip sides of the same coin, though? You can express risk in either language, and if either is rising that means that the evaluation of risk has risen too. I don't know that this really makes me personally feel better.
LocalTrust 7y ago
You’re right. Thanks for this comment. It’s really helpful. I’m still wondering what the factors are that created this gap. If financial institutions aren’t losing confidence in each other or the assets that are been posting as collateral, why is there a cash shortage in the overnight market?

diminoten 7y ago

30 days * $100 billion = 3 trillion dollars. Wat. Seriously, can someone explain what that actually means? Surely there isn't literally 3 trillion dollars moving around...

somebodythere 7y ago
75 billion dollar loans, repaid the next day, for 20 days.
rwmurrayVT 7y ago
It's 'overnight'. Theoretically the same "atleast $75b" could be used daily.
- diminoten 7y ago
  Thanks. Guess asking a genuine question on HN isn't okay, judging by the downvotes..

perseusprime11 7y ago

Isn't this just an overnight loan?

jVinc 7y ago

So in that situation, the banks are basically in a position where raising their rates (which earns them more) will lead to the feds covering more and more of that? What's to stop them from collectively playing chicken against the feds, while shoveling money into the bag until it becomes ridicules? I mean normally I'd expect a business being close to bankruptcy being told by an investor "This simply cannot happen, I will inject money indiscriminately until you float!!" will start looking for money dumps like buying verbs from CEO's, not opportunities to actually bring the business back in good standing.

dpc_pw 7y ago
What you've described is already happening, just on a global scale. For 10 or more years, whole financial system is just pushing slowly and collectively the lever, knowing that central banks will not allow it to collapse. So as long, as you're not outstandingly fragile, and instead your collapse would mean a collapse of most of similar financial agents, you can always push your risk a little bit higher, forcing your competition to the same.
- beamatronic 7y ago
  So, where should we put our money?
  - n-exploit 7y ago
    Decentralized currencies.

arez 7y ago

nobody is loosing trust, where are you getting that from? There's just not enough cash at hand so the fed is injecting some. People see doomsday scenarios where there is none

adrr 7y ago

They are screwing over some of the fintechs that provide banking services and use overnight lending to make money on the deposits.