Bank Emergency … or Not?
Two red lights flashed on Friday in the world of central banks—one at the US Federal Reserve and one at the Reserve Bank of India.
You’ve heard me refer back to the repo crisis of 2019, which forced the Fed to leap back into doing massive quantitative easing (money “printing”) to replenish cash reserves in banks after they took their balance-sheet reserves down further than the banks could handle.
Repo loans are overnight loans banks take out from other banks to reconcile their accounts at the end of the day if they are short on cash to cover all the checks and debits that came through due to getting too many withdrawals and/or not enough deposits. Normally banks use Treasuries from their own reserves as collateral to trade with other banks for cash at very low interest rates due to be collateralized in US Treasuries.
Banks are normally reluctant to use the Fed’s “repo facility,” because doing those overnights loans with the Fed has long carried the stigma of bank troubles in that it looks like no other bank wants to touch you. When a bank turns to the Fed for one of these overnight loans it is typically because the borrower is looking like trouble to other banks or because all other banks are also tight on cash reserves or stuffed with Treasuries so they don’t want to lend to anyone. Either situation looks bad.
Well, on Friday the repo alarm light started spinning again … like this:
https://citizenwatchreport.com/bank-emergency-or-not/