On September 17, the repo rate more than doubled from the previous day, jumping from 2.42% to 5.25%. (1) Strangely, the effective fed fund rate and the Libor rate which move in unison with the repo rate, remained virtually unchanged that day. Surprised and concerned that a liquidity crisis was in the making, the Federal Reserve injected $53 billion into the repo market and another $75 billion the following day. But, how could there be a liquidity crisis when the fed fund and Libor market rates stayed stable and banks have $1.305 billion of excess reserves? Excess reserves are funds banks keep at the Federal Reserve beyond and above the required reserves they are expected to maintain to respond to liquidity crises. (2)
There was no crisis. So, what was the repo market hick-up all about? Jamie Dimon, CEO of JPMorgan Chase, gives the answer in an interview . The target is the Liquidity Coverage Ratio. Banks want it to be relaxed. So, they refrained from intervening in the repo market, creating a temporary shortage of liquidity. After their recent victory on the Volcker Rule (3), banks believed they may score another big win this time on the liquidity front. So far to no avail. The Federal Reserve is not falling for it. But with a President who is very much against regulations, there are grounds for optimism.
Wouldn't a relaxation of the Liquidity Coverage Ratio increase the intensity of the next financial crisis? Of course, it would. But this is no concern of the likes of Jamie Dimon. His bank and a few others are considered too big to fail this means they will be bailed out by the authorities, if necessary. So, when the next crisis strikes, he, his bank and his shareholders will come out unscathed, as in September 2008. Why worry? The tab will be picked up by Federal authorities, i.e. by the average American.
(1) "Repo" or "repurchase agreement": short-term loans (mostly overnight), secured by government securities.
(2) Banks had no excess reserves in September 2008.
(3) The Volcker Rule restricts banks' ability to trade for their account with customers' deposits. The rule was relaxed in early September.