Repo: The Abundant Reserves Regime Is Broken

Dec. 17, 2019 12:10 AM ETBAC, C, JPM, WFC85 Comments


  • The Bank of International Settlements is out with their quarterly report, and it provides some background on what is happening in the overnight funding markets.
  • They focus on the 4 largest banks, presumably JPMorgan, Bank of America, Citibank and Wells Fargo, and mostly just the original September Repo Revolt.
  • The private sector repo market has become almost entirely dependent on the Big Four for liquidity. They are near their limits. When they are tight, the whole system is.
  • The increasing size and terms of Fed repo deals, QE-level open market purchases, and half a trillion in year-end repo tell us something is seriously wrong with the abundant reserves regime.
  • This is all rooted in the accelerated inflows of Federal debt, and the inability or unwillingness at current rates, for private nonfinancial sectors to absorb it. Full QE is almost inevitable.

Daddy’s Daddy

The Bank of International Settlements is sponsored by about 60 central banks, ranging from the Fed to the Bank of Algeria and everything in between. Mostly what they do is produce white papers, but they also provide crucial international counterparty settlement functions, as the name suggests. It’s located in Switzerland, which makes it a sweet gig for macroeconomists who like to write white papers and attend symposia in European capitals.

Last week, the BIS’s Quarterly Review came hot off the presses, and unusually it caused a bit of a stir from a 3-page section on the September Repo Revolt. BIS has more granular data than us, down to the firm-level, and they focused on a couple of things in addition to the oft-mentioned perfect storm of new Treasuries, corporate tax payments, and payrolls all coming at once.

  • The US Treasury was coming off the debt ceiling extension in August, and was restocking their checking account - more perfect storm upper atmosphere turbulence. This pulled out $120 billion in reserves in the preceding month, half of that in the preceding week.
  • The four largest US banks, presumably JPMorgan (JPM), Bank of America (BAC), Citibank (C), and Wells Fargo (WFC), have taken on a ton of Treasuries. Over 40% of their combined liquidity is in Treasuries, up sharply since 2017.
  • They also suggest through indirect evidence that much of the stress is coming from the secondary FICC-cleared repo market, where hedge funds do their contracts. Let the speculation begin.

Overall, the story they tell calls into question some of what we are hearing from the Fed and the big banks, and suggests that more structural issues are at work, outside the Fed's control.

If you need a refresher on the September Repo Revolt and how the overnight markets work, you

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