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In case like me you wondered "Why would anyone need money overnight? (or just for a second, actually)" EDIT: As the commenter below points out, it is actually o

In case like me you wondered "Why would anyone need money overnight? (or just for a second, actually)" EDIT: As the commenter below points out, it is actually over very short periods to even out a 2 week average period, but the mechanic is indeed as explained AFAIK the "overnight loans" are a vehicle to dodge the reserve requirements for banks. In theory the bank is not allowed to fall below a certain reserve threshold because they would be too fragile towards bank-runs. This is needed because left to their own devices banks would just leverage to the max regardless of their cash position. The crucial point is that the reserve is only measured at the end of day, so a bank can dip below the safety thresholds as long as they make it up by the evening. Overnight loans allow them to ignore the safeties since they just loan the cash for a brief moment to be in the clear with regulation come the daily measuring, but just return the money straight after the measurement has taken place. It is an organized method by which the Fed facilitates regulation dodging for the financial sector.

joering2 7y ago
Thank you. This is actually first comment that explains whats going on. Now since my understanding is that this is something relatively new (in terms of volume pumped in) can someone explains WHY this is happening? Why banks need to dip below the line so often these days. And is this behaviour can come eventually with some negatvie consequences to banks or individuals holding loans, stocks etc?
- IshKebab 7y ago
  Well, if you can trade all of your customers' money you make more profit! Yes your risk of collapse is higher, but that's somebody else's problem.
- PeterStuer 7y ago
  I would speculate that as this regulation dodge vehicle is being increasingly needed to be invoked, that means that the regulation is being skirted to a higher degree than in the past. Since the regulation was introduced to reign in irresponsible freewheeling and extreme risk taking by banks, the logical conclusion must be that the banks despite the regulation that was intended to keep them into a position that was in line with their public responsibility are at it again.
  - joering2 7y ago
    So less regulation allows banks to use their clients money more aggressively. Then why would banks need to borrow so much money? And if its returned overnight, then why is FED keep pumping more and more? Can something bad for market come out of it? Like one of big bangs bankrupting or something?
24gttghh 7y ago
If this is indeed the case, my outrage at the headline would seem warranted.
dzab 7y ago
Yes, this. Well put
apacheCamel 7y ago
Why would the Fed allow this? Who created the regulation saying they needed a threshold and why aren't they putting more teeth into it? It seems silly to me to have a regulation without proper enforcement and it seems insane to me that the Fed is complicit.
- samsolomon 7y ago
  I'm also interested why the FED would want to do this. Could it be to maintain interest rates at a certain target? If the banks don't have money to lend, would it cause them to charge higher interest on their loans?
  - PeterStuer 7y ago
    Banks don't actually need money to lend money. They just create a loaned amount credit in one account and a corresponding asset consisting of a future revenue stream on the other side. The cash reserve is just a collateral against the risk, needed to stabilize public trust they will not default at the slightest ill wind.
- quickthrowman 7y ago
  The banks have assets that are worth money they can post as collateral to borrow the cash to meet reserve requirements. Or would you rather have banks unloading massive stacks of treasuries at market close daily to meet their cash needs, creating volatility in bond markets? Repo lending means banks don’t have to unwind their positions daily due to a cash shortage, because they have other assets they can post as collateral for cash. It’s not a bad thing.
  - PeterStuer 7y ago
    Tell me: Why was the cash reserve regulation introduced? What problem did it address? Why, if banks are not able to comply with this regulation without "unloading massive stacks of treasuries at market close daily", are they allowed to load up on "massive stacks of treasuries" flaunting the cash reserve regulation in the first place?
aguyfromnb 7y ago
>In theory the bank is not allowed to fall below a certain reserve threshold because they would be too fragile towards bank-runs. This is not true in reality. The only reserve requirements on financial institutions are on household deposits, and it's peace-of-mind that if 10% of Joe Public depositors show up one day demanding their money the bank won't have to deny. Functionally there are zero reserve requirements on the vast major of financial institution assets. It's been a long time since the banks have been anywhere near reserve constrained. Many central banks don't even have reserve ratios (like mine in Canada). Sure this stuff is complicated, but you can literally look it up on Wikipedia. The econ 102 money-multiplier model of deposits is not how modern banking works. >It is an organized method by which the Fed facilitates regulation dodging for the financial sector. This is borderline conspiracy theorizing, and it's kind of sad that people blindly accept it.
joncrane 7y ago
It's actually measured as an average over a two-week period. Unsurprisingly, lending and borrowing activity is highest on the last day of the measurement period. Generally speaking, banks try to maintain a steady reserve ratio over the whole period, but there's some wiggle room to play it a little loose and just borrow a lot on the last 1 or 2 days of the measurement period. Source: I used to work at the Fed and studied these patterns.
- PeterStuer 7y ago
  Thank you for the extra clarification.
jklein11 7y ago
I am by no means an expert but I thought these repurchase agreements served a different purpose. Lets say that you are Lerrill Mynch. You have 2 clients, today client 1 has $10,000 in AAPL and client 2 has $10,000 in cash. Client 1 decides to sell $10,000 in AAPL and Client 2 decides to buy $10,000 in Ford. You go to the market and find that Soldman Gachs has a client that wants to buy $10,000 in AAPL and MP Jorgan has a client looking to sell $10,000 in Ford. Everyone agrees and everything is happy. Overnight Lerrill Mynch needs to makes sure that Soldman Gachs gets the 10k, Client 1 gets the shares in the security, MP Jorgan gets the 10k and Client 2 gets the Ford shares. In order to make sure that this whole transaction clears, Lerrill Mynch has to make sure that they have enough cash to cover the transaction.

joering2 7y ago

Thank you. This is actually first comment that explains whats going on. Now since my understanding is that this is something relatively new (in terms of volume pumped in) can someone explains WHY this is happening? Why banks need to dip below the line so often these days. And is this behaviour can come eventually with some negatvie consequences to banks or individuals holding loans, stocks etc?

IshKebab 7y ago
Well, if you can trade all of your customers' money you make more profit! Yes your risk of collapse is higher, but that's somebody else's problem.
PeterStuer 7y ago
I would speculate that as this regulation dodge vehicle is being increasingly needed to be invoked, that means that the regulation is being skirted to a higher degree than in the past. Since the regulation was introduced to reign in irresponsible freewheeling and extreme risk taking by banks, the logical conclusion must be that the banks despite the regulation that was intended to keep them into a position that was in line with their public responsibility are at it again.
- joering2 7y ago
  So less regulation allows banks to use their clients money more aggressively. Then why would banks need to borrow so much money? And if its returned overnight, then why is FED keep pumping more and more? Can something bad for market come out of it? Like one of big bangs bankrupting or something?

24gttghh 7y ago

If this is indeed the case, my outrage at the headline would seem warranted.

dzab 7y ago

Yes, this. Well put

apacheCamel 7y ago

Why would the Fed allow this? Who created the regulation saying they needed a threshold and why aren't they putting more teeth into it? It seems silly to me to have a regulation without proper enforcement and it seems insane to me that the Fed is complicit.

samsolomon 7y ago
I'm also interested why the FED would want to do this. Could it be to maintain interest rates at a certain target? If the banks don't have money to lend, would it cause them to charge higher interest on their loans?
- PeterStuer 7y ago
  Banks don't actually need money to lend money. They just create a loaned amount credit in one account and a corresponding asset consisting of a future revenue stream on the other side. The cash reserve is just a collateral against the risk, needed to stabilize public trust they will not default at the slightest ill wind.
quickthrowman 7y ago
The banks have assets that are worth money they can post as collateral to borrow the cash to meet reserve requirements. Or would you rather have banks unloading massive stacks of treasuries at market close daily to meet their cash needs, creating volatility in bond markets? Repo lending means banks don’t have to unwind their positions daily due to a cash shortage, because they have other assets they can post as collateral for cash. It’s not a bad thing.
- PeterStuer 7y ago
  Tell me: Why was the cash reserve regulation introduced? What problem did it address? Why, if banks are not able to comply with this regulation without "unloading massive stacks of treasuries at market close daily", are they allowed to load up on "massive stacks of treasuries" flaunting the cash reserve regulation in the first place?

aguyfromnb 7y ago

>In theory the bank is not allowed to fall below a certain reserve threshold because they would be too fragile towards bank-runs. This is not true in reality. The only reserve requirements on financial institutions are on household deposits, and it's peace-of-mind that if 10% of Joe Public depositors show up one day demanding their money the bank won't have to deny. Functionally there are zero reserve requirements on the vast major of financial institution assets. It's been a long time since the banks have been anywhere near reserve constrained. Many central banks don't even have reserve ratios (like mine in Canada). Sure this stuff is complicated, but you can literally look it up on Wikipedia. The econ 102 money-multiplier model of deposits is not how modern banking works. >It is an organized method by which the Fed facilitates regulation dodging for the financial sector. This is borderline conspiracy theorizing, and it's kind of sad that people blindly accept it.

joncrane 7y ago

It's actually measured as an average over a two-week period. Unsurprisingly, lending and borrowing activity is highest on the last day of the measurement period. Generally speaking, banks try to maintain a steady reserve ratio over the whole period, but there's some wiggle room to play it a little loose and just borrow a lot on the last 1 or 2 days of the measurement period. Source: I used to work at the Fed and studied these patterns.

PeterStuer 7y ago
Thank you for the extra clarification.

jklein11 7y ago

I am by no means an expert but I thought these repurchase agreements served a different purpose. Lets say that you are Lerrill Mynch. You have 2 clients, today client 1 has $10,000 in AAPL and client 2 has $10,000 in cash. Client 1 decides to sell $10,000 in AAPL and Client 2 decides to buy $10,000 in Ford. You go to the market and find that Soldman Gachs has a client that wants to buy $10,000 in AAPL and MP Jorgan has a client looking to sell $10,000 in Ford. Everyone agrees and everything is happy. Overnight Lerrill Mynch needs to makes sure that Soldman Gachs gets the 10k, Client 1 gets the shares in the security, MP Jorgan gets the 10k and Client 2 gets the Ford shares. In order to make sure that this whole transaction clears, Lerrill Mynch has to make sure that they have enough cash to cover the transaction.