The unwillingness of the highest four U.S. banks to lend money mixed with a burst of demand from hedge funds for secured funding may clarify a current spike in U.S. cash market charges, the Bank for International Settlements stated.
Cash obtainable to banks for short-term funding all however dried up in late September, and rates of interest deep within the plumbing of U.S. financial markets climbed into double digits. That pressured the Fed to make an emergency injection of billions of dollars for the primary time because of the world financial crisis greater than a decade ago.
Whereas the precise reason for the squeeze is unclear – with explanations starting from giant withdrawals for quarterly tax funds to an enormous settlement of a trade-in U.S. Treasuries – BIS analysts stated the rising reliance on the largest U.S. banks to maintain the repo market functioning might have been a big issue.
The massive four banks, which BIS didn’t identify in its report, have to turn out to be net suppliers of funds to repo markets as they account for greater than half of all Treasuries held by banks in the USA on the Federal Reserve.
The repo market underpins a lot of the U.S. financial system, serving to guarantee banks have the liquidity to fulfill their everyday operational wants.
In a repo trade, Wall Street firms and banks provide U.S. Treasuries and different high-quality securities as collateral to lift cash, usually simply in a single day, to finance their trading and lending. The next day, borrowers repay the loans plus what is usually a nominal rate of interest and get their bonds again.