Does regulation have a role in the repo rise?

Fed data show large banks are keeping a disproportionate amount in reserves, relative to their assets. The 25 largest US banks held an average of 8 per cent of their total assets in reserves at the end of the second quarter, versus 6 per cent for all other banks. Meanwhile, the four largest US banks — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo — together held $377bn in cash reserves at the end of the second quarter this year, far more than the remaining 21 banks in the top 25.

Since the financial crisis, large banks have been obliged to meet a liquidity coverage ratio (LCR) — a portion of high-quality assets such as cash reserves and Treasuries that can be sold quickly to keep the lights on for a month in a crisis. But regulations also require them to track intraday liquidity — cash they can immediately access — which does not include Treasuries. This additional requirement can vary depending on their business models, which in turn inform supervisors’ and examiners’ bank-specific demands. Executives at several large banks say this puts a de facto premium on reserves that varies by bank..

Second-quarter data from the four largest reserve holders show Wells Fargo held 39 per cent of its high-quality liquid assets in reserves. JPMorgan held 22 per cent, Bank of America held 15 per cent and Citigroup 14 per cent.

“If you have a very large concentration in a few institutions and you lose one or two on any day, then you are losing a major portion of your funding,” said Jim Tabacchi, chief executive at South Street Securities, a broker dealer active in short-term debt markets. “Rates have to skyrocket. It’s simple math.”

Here is the full FT article.


"If you have a very large concentration in a few institutions and you lose one or two on any day, then you are losing a major portion of your funding"

Those bank bailouts and forced consolidations are gifts that keep on giving. We need a new banking system. Why hasn't Silicon Valley disrupted this corrupt loser of an industry? At least there, scams go out of business. Wall Street will suckle the government teat and bleed the people dry.

I’m eagerly awaiting Tyler’s next book, Big Banks: An American Love Story. It would be disappointing if he doesn’t affectionately call Big Banks “bb” throughout.

It is the tree trunk effect.

Large banks are also part of the primary dealership system to balance Treasury liquidity. This system is a constrained channel, fixed bandwidth using requantization to mange entry and exit. Treasury liquidity is moved in very large chunks and need very large chunk handlers to carry it through the tree trunk. That is why we get the inertia effect in excess reserves, excess reserves cannot change until a very large bin if mostly full and ready to ship. Quantization and momentum are versions of the same property. In our algebra that property is the commutative property, the ability to exchange the order of arrival in optimally congest flows. Commutativity make ratios work The primary dealership, using commutativity, can make the flow of debt appear linear within some limited range. Treasury can predict the future a bit. It is a multi stage facotory that generates linearity of Treasury debt as a final product. Or, a debt slinging industry, if you will.

Easy for you to say...

1. It's about leverage not reserves: "Broker-dealers, hedge funds and other institutional investors who rely on leverage to run their operations are seeing the biggest impact of higher overnight repo rates, said Stephen Stanley, chief economist at Amherst Pierpont, which in May became one of 24 primary dealers in the U.S. Treasury debt market. "The repo market is the market where people running leveraged positions borrow,” Stanley told MarketWatch in an interview. “Obviously, that doesn’t apply to 401(k) funds or mutual funds, where you are investing real money without leverage.”

2. Timing of events; "Pacific Investment Management Company said that soaring repo rates earlier this week can be tied to a culmination of events, including $35 billion of corporate tax payments and dealers needing an extra $20 billion in funding to settle recent U.S. Treasury issuance, which helped sap market liquidity."

3. You say you want the Fed to reduce its balance sheet: "A team led by Jerome Schneider, head of short-term portfolio management, pointed to further potential liquidity strains from the Fed’s reduction of its balance sheet to $1.4 trillion from $2.3 trillion in August 2017, at the same time banks have nearly doubled their Treasury holdings to $200 billion. “We expect these episodes of funding stresses to become more frequent with demand for funding and U.S. Treasury supply forecast to increase heading into year-end and the Fed’s reserve levels likely to drop further,” the Pimco team wrote."

If banks had to satisfy the LCR requirements since the financial crisis over 10 years ago, why is this a problem now? If banks have been paying their taxes since the day they started business, why is that a problem now? Something doesn't quite add up here.

I read somewhere that it was a one-off dip in liquidity caused by companies withdrawing funds to pay taxes and, coincidentally at the same time, a large bond payout.

Too big to fail. And too big to regulate. Who said breaking them up wasn't the right thing to do, 10 years ago?

Is this because of the Basel III Accord requirements brought up here earlier? I am not able to access the FT article.

I recommend checking out John Williams's interview with Jim Hamilton on Econbrowser on all this.

Perhaps the Federal Reserve can't fix this problem by increasing its bond holdings, the mirror image of which is the aggregate of private bank reserves. No matter what the level of the Fed's bond holdings there will be a minority of private financial institutions that will from time to time be low on cash if short term rates are too high. Just lower the short term rate by buying more bonds. They can long term bonds or short term bonds or both. All such transactions put more reserves into private hands. This will not eliminate the problem but it will reduce the likelihood of short term rate spikes. The minority cannot be managed by manipulating an aggregate variable.

If the point is to lower the short term rates then may be don't also be paying interest on excess reserves. This is the thing the Fed has been doing since 2008. It may not be necessary to drive with two steering wheels.

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