Eye-Popping Surge in Repo Rate Blamed on Rules Instead of Funding Stress

A combination of factors, including the impact of regulation and banks’ increased presence within the repo market, helped to fuel Monday’s “eye-popping” move, according to Lou Crandall, an economist at Wrightson ICAP in New York. A decline in the level of bank balances held at the Federal Reserve means that financial institutions have in general increased the amount they lend in the repo market as they seek somewhere safe and liquid to park money that enables them to meet regulatory obligations. One complication is that these same banks tidy their balance sheets at year-end when regulatory surcharges are calculated. As part of their bid to lessen these regulatory imposts, banks tend to pare their exposure to repo, which in turn makes it more expensive for borrowers.