Implications of Reverse Repos with the Fed?

Water Cooler Investing
#1

Can reverse Repos tank the market?

This is sucking trillions in liquidity. Could this be the prick that bursts the bubble?

#2

yep they are sucking liqudiity. but thats because everyone is flush with cash due to monetary and fiscal stimulus. reverse repos offer another way to invest rather than investing in t bills that are close to negative. the most hurt player if this continues are money market funds.
but here’s a few ways to fix this:

  1. have govt issue t bills. this would reduce reverse repo demand because of a better sub. but the current focus is to lock long term rates by govt. this will not tank the market.
  2. raise rates. that way banks will actually make loans. hence reducing the need for reverse repos. but govt cant afford higher rates right now. maybe after they raise taxes and reduce debt load. or grow gdp. raising rates will tank the market.
  3. reduce regulatory capital reqs. that way having deposits on hand by banks wont be that bad. keep in mind, banks get penalized for having too much deposits. this will not tank the market.
#3

I think you’re confusing capital requirements with reserve requirements. Reserve requirements are a function of deposits and have been reduced to 0 by the Fed. Capital requirements keep banks solvent when their shoddy risk management lets too many bad loans go through.

Or do you like bailing out SIFIs with your tax dollars?

#4

nahhh. capital requirements. this article will offer clarity.

“Such lenders are now facing particularly tough headwinds thanks to the recent lifting of a temporary COVID-era rule that excluded US Treasuries and cash from lenders’ supplementary leverage ratio (SLR) requirement calculations. As such, they now have to be extra careful to ensure the amounts of deposits they hold don’t exceed regulatory thresholds.”

this article explain the role reverse repos have played

#5

My concern is counterparty risk. What does it say when the commercial banking system tells the Fed, take my money and pay me 5 bps when GS or JPM could pay you 15 bps?

#6

commercial banks are deflecting the deposits to the money market funds by telling their customers. its the money market funds that are taking the hit with the reverse repos. what they need are more t bills