With memories of September's historic spike in short-term funding costs sti...
- With memories of September’s historic spike in short-term funding costs still raw, Wall Street and the Federal Reserve are gearing up for another potential cash crunch at year end.
And a new wild card may come into play this month. Some large banks may scale back lending in the repo market in an effort to shrink their balance sheets to avoid regulatory penalties, which would add to the funding stress. The U.S. central bank has been injecting tens of billions of dollars of cash into overnight lending markets through daily and longer-term operations in the repo market since mid-September. And in mid-October, it began purchasing $60 billion a month in Treasury bills to raise the level of reserves in the banking system.
Investors snapped them up, with bids for all three of the longer repo operations exceeding supply. The Fed upped the size of the second and third offerings by $10 billion each and officials have said they are willing to adjust the repo operations as needed to keep markets running smoothly. The central bank is scheduled to issue an update on the balance sheet program on Thursday.
Money markets will be tested again on Dec. 31, when some large banks may reduce their repo lending to shrink their balance sheets and avoid higher capital surcharges, said Teresa Ho, U.S. short-term fixed income strategist for JPMorgan Chase. Some banks that are not subject to the same requirements may help to spread liquidity by lending in repo markets, Ho said, but it is difficult to know how heavily they will participate. “That doesn’t mean they’re going to go all in,” she said.
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