Economics of Money and Banking / Perry G Mehrling / Ders 1

How does FED's repo auction affect the repo market ?




Everbody knows that USA repo market is shaken in mid the  September 2019 (exactly 16-17 September ). There are a lot of  rumors, ideas and comments on this issue. I don't find real reason of this turmoil however I found how FED decreased repo market rate to the normal level with repo auctions.

These are my arguments.


The Fed undertakes repurchase agreement operations with primary dealer (in which the Fed purchases Treasury securities from primary dealer with a promise to buy it back on a specific date). Dealer does not have account in the FED and this transaction is realized through the some custodian bank. FED send the reserves to the custodian bank of dealer and this bank creates deposits for dealer.

FED
Assets
Liabilities
+ Treasury Bill
+ Bank Reserves



BANK
Assets
Liabilities
+ Bank Reserves
+ Deposits



DEALER
Assets
Liabilities
 - Treasury Bill

 + Deposits



My arguments are as follows:

 FED's repo auction eased the repo market with 2 different process

a- FED bought collateral (securities) from dealers

b-FED injected to the liquidity (as deposits) to the repo market.


Sincerely
Dr. Engin YILMAZ
Turkey

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