(Bloomberg) -- The Federal Reserve could design a permanent tool that would unlock “a significant fraction of cash” currently held by larger banks and prevent funding stresses, according to analysts at JPMorgan Chase & Co.
Strategists led by Joshua Younger said in a note to clients Thursday that the central bank could create a standing repurchase-agreement facility that would be accessible by all depository institutions and include it as a source of liquidity for resolution planning. This would free up cash that is currently held by the banks for regulatory purposes and “allow reserves to be more evenly distributed through the banking system.”
JPMorgan, America’s largest bank and one of the biggest players in the repo market, was among those that blamed post-financial crisis bank regulations as one of the factors behind September’s turmoil in funding markets. Chief Executive Officer Jamie Dimon told analysts on Oct. 15 that while the bank had the cash, regulation prevented it from using it to calm the repo market.
That upheaval briefly sent the rate on overnight repurchase agreements spiraling to around 10% and raised questions about the Fed’s ability to control its main policy lever, the fed funds rate. The spike prompted the Fed to step in with temporary repo-market operations that are expected to run through January, and to boost bank reserves through the purchase of Treasury bills.
The U.S. central bank has been studying the idea of a standing repo facility for some time. Chairman Jerome Powell said at a news conference after Wednesday’s Federal Open Market Committee meeting that there are some technical things the central bank can look at that would make the liquidity “move more freely” without compromising the soundness of the system.
Even with the steps taken so far by the Fed, the market remains susceptible to upward pressures in repo rates. On Thursday, with month-end financing needs and Treasury auction settlements added into the mix, rates were above the recently lowered central bank target for fed funds. And the Fed’s most recent term operations have all been oversubscribed, suggesting thirst for liquidity from the central bank.
The banks’ inability to “police” the repo market in September wasn’t a lack of access to cash, but restrictions in their “ability to deploy it,” Younger and his colleagues wrote.
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