Bank Repurchase Agreements
If the Fed wants to tighten the money supply, hungry for liquidity, it sells the bonds to commercial banks through a pension purchase contract or a brief repot. They will then buy back the securities through a back-cutting and repay money in the system. A pension contract, also called repo, PR or sales and repurchase contract, is a form of short-term borrowing, mainly in government bonds. The distributor sells the underlying guarantee to investors and, by mutual agreement between the two parties, buys it back shortly thereafter, usually the next day, at a slightly higher price. The value of the security is generally higher than the purchase price of the securities. The buyer agrees not to sell the security unless the seller comes from his late part of the agreement. On the agreed date, the seller must repurchase the securities, including the agreed interest rate or pension rate. The short answer is yes – but there are significant differences of opinion on the extent of this factor. Banks and their lobbyists tend to characterize regulation as a bigger cause of problems than policy makers who put in place the new rules after the 2007-9 global financial crisis. The objective of the rules was to ensure that banks had sufficient capital and liquidity, which can be sold quickly in the event of difficulties.
These rules may have allowed banks to keep reserves rather than lend them to the repo market in exchange for treasury bills. Repo is a form of guaranteed loan. A basket of securities serves as an underlying guarantee for the loan. Securities law is transferred from the seller to the buyer and returns to the original owner after the contract is concluded. The most commonly used guarantees in this market are U.S. Treasury bonds. However, government bonds, agency securities, mortgage-backed securities, corporate bonds or even shares can be used in a repurchase transaction. With respect to securities lending, it is used to temporarily obtain the guarantee for other purposes, for example.
B for short position hedging or for use in complex financial structures. Securities are generally borrowed for a royalty, and securities borrowing transactions are subject to other types of legal agreements than deposits. A pension contract (repo) is a short-term guaranteed credit: one party sells securities to another and agrees to buy them back at a higher price at a later price. The securities serve as collateral. The difference between the initial price of the securities and their redemption price is that of the interest paid on the loan called the pension rate. At the Hutchins Center event, however, Tarullo found that reserves and treasuries «are not treated as fungible when planning resolution or liquidity stress tests.» In the post-crisis context, banks are required to conduct their own internal liquidity resistance tests, the Comprehensive Liquidity Analysis and Review (CLAR), which are controlled by supervisory authorities. Banks prefer reserves for balances because reserves can meet large intra-day commitments that Treasuries are unable to meet. Banks also say that state supervisors sometimes express a preference, that banks hold reserves instead of Treasury bills by questioning the assumptions banks make when they say they could quickly sell government bonds without much discount in a moment of stress. There are mechanisms built into the possibility of buyback agreements to reduce this risk. For example, many depots are over-secure. In many cases, a margin call may take effect to ask the borrower to change the securities offered when the security loses value.