Fed Adds $110.1 Billion to Financial System in Latest Transaction

The central bank continues to dip into repo market to relieve funding pressure in money markets

The Federal Reserve Bank of New York is using the market for repurchase agreements to relieve funding pressure. Photo: Claudio Papapietro for The Wall Street Journa

The Federal Reserve Bank of New York added $110.1 billion to the financial system Thursday, using the market for repurchase agreements, or repo, to relieve funding pressure in money markets. In the repo market, borrowers seeking cash offer lenders collateral in the form of safe securities—frequently Treasury bonds—in exchange for a short-term loan. The term of these loans can be as short as overnight. The borrowers are often banks, securities firms or hedge funds that use the cash to finance positions in the market. The lenders can include money-market mutual funds, banks or hedge funds that are seeking to earn a slightly higher rate of interest than what is available from holding very short-term government securities. Banks asked for $72.75 billion in 14-day cash loans, $12.75 billion more than the amount offered by the Fed, offering collateral in the form of Treasury and mortgage securities. In a second separate operation, banks asked for $50.1 billion in overnight reserves, all of which the Fed accepted, offering collateral in the form of Treasury and mortgage securities.

Officials said Wednesday that they were increasing the amount of funding being made available through the repo market after requests by banks for cash at offerings on Tuesday and Wednesday exceeded the amount offered by the Fed.

The Fed began offering repo loans last week after a shortage of available cash in the financial system led repo rates to climb as financial companies scrambled for overnight funding. The actions marked the first time since the financial crisis that the Fed had taken such actions. Thursday’s operations were the ninth and 10th since last week in which the Fed has intervened to calm roiled money markets. Rates on short-term repos briefly spiked to nearly 10% last week as financial companies scrambled for overnight funding. Nick Bit: we have been warning for months now about  the cash crunch in the worlds biggest banks. This has started with Duche bag bank in Germany wiping out a trillion dollars in their trade book. The counter party fallout has just begun and is spreading. Give it another year or two and we will have another Lehman moment… I can’t wait!