Understanding Repurchase Agreements Repos

Some researchers disagree. A Stanford Business School study found that 90% of deposits were supported by ultra-secure U.S. treasures. In addition, deposits accounted for only $400 billion of the $2.3 trillion in money fund assets. The researchers concluded that the “Cash Crunch” occurred in the commercial guarantee market. When the underlying assets lost value, the banks retained securities that no one wanted. It emptied of its capital and caused the financial crisis. Term refers to a repository with an indicated end date: Although rests are usually short term (a few days), it is not uncommon to see rest with a lifespan of up to two years. Beginning in late 2008, the Fed and other regulators adopted new rules to address these and other concerns. One consequence of these rules was to increase pressure on banks to maintain their safest assets, such as Treasuries. They are encouraged not to borrow them through boarding agreements.

According to Bloomberg, the impact of the regulation was significant: at the end of 2008, the estimated value of the world securities borrowed was nearly $4 trillion. But since then, that number has been close to $2 trillion. In addition, the Fed has increasingly entered into pension agreements (or reverse buybacks) to compensate for temporary fluctuations in bank reserves. When state-owned central banks buy back securities from private banks, they do so at an updated interest rate, called a pension rate. Like policy rates, pension rates are set by central banks. The repo-rate system allows governments to control the money supply within economies by increasing or decreasing available resources. A reduction in pension rates encourages banks to resell securities for cash to the state. This increases the money supply available to the general economy. Conversely, by raising pension rates, central banks can effectively reduce the money supply by discouraging banks from reselling these securities. Deposits with a specified maturity date (usually the following day or the following week) are long-term pension transactions. A trader sells securities to a counterparty with the agreement that he will buy them back at a higher price at a given time.