As banks have retrenched, the Fed has emerged as a major player in repo, which has given money funds other investment options to fill the void as dealers backed away.
The Fed got more involved in 2013 when it introduced an overnight reverse repo facility -- dubbed RRP. In this daily operation, the Fed offers counterparties such as money funds a fixed rate for parking cash with it overnight.
John Ryding, co-founder of RDQ Economics and the top U.S. economist at Bear Stearns when it was absorbed by JPMorgan, adds a new concern: the fact that Congressional measures have crimped the Fed’s ability to support individual firms in a future crisis.
In an extreme situation, “you need to have an unconstrained ability of the central bank to intervene,” said Ryding, who quickly brings to mind how on Friday, March 14, 2008, Bear’s repo desk told him access to funding was vanishing and set to be gone by Monday. On Sunday it was announced that JPMorgan had agreed to buy Bear with the Fed providing some financing.
“The financial system is a lot safer: There is more capital and it has a more forward-looking assessment of situations that could go on,” Ryding said. “But is the situation ideal now? No. And can we guarantee we won’t have another situation like that again? I don’t think we can.”
This article provided by Bloomberg News.