Enter the Reverse Repo Facility – Economy Bitcoin News

The US Federal Reserve could be competing with commercial banks because of a service called the “overnight reverse repo service,” which has currently attracted more than $2 trillion in deposits. This has affected bank deposits, analysts say, as investors rush to take advantage of the higher yields it offers compared to traditional banks.

Fed’s ‘Reverse Repo’ Facility is Hitting Bank Deposits, Analysts Say

The recent banking crisis has made people worry about the safety of the American banking system, and while at a high level some are still pinpointing the causes that led to the fall of Silvergate, Signature and Silicon Valley Bank, there is another phenomenon that it is affecting the health of this system.

The “overnight reverse repurchase facility,” or reverse repo as it is commonly known, allows money market funds, which are investment vehicles Known for investing in low-risk instruments, to park money at the US Federal Reserve while earning higher interest than what commercial banks offer.

The facility, which was introduced in 2013 by the Federal Reserve as support for a potential shortage of low-risk investment options in the market, ended last month with $2.3 trillion in funding, down from a record $ 2.5 trillion reached in December. 30, 2022, by numbers from the St. Louis Federal Reserve.

Analysts have pointed out that the availability of this instrument is causing a flight towards the quality of bank deposit flows, which have been below by nearly $126 million in the weeks after the banking crisis, marking the biggest drop since June 2021. The Bank Policy Institute (BPI), a fellow research group for US banks, fixed:

While money funds also invest in Treasury bills, when they accumulate in the bills, the yields on the bills are reduced, reducing their attractiveness. It is only the reverse repo with its returns that is insensitive to supply and demand, which serves as a black hole for bank deposits.

Proposed solutions to the problem

This “black hole,” as the BIS called it, has a relatively simple solution, according to some. According to an Axios article, this is a profitability issue, as banks don’t compete with the Federal Reserve, offer lower returns, and aren’t as attractive to investors. Neil Irwin, Axios Chief Business Correspondent fixed:

The sucking sound of money coming out of banks wouldn’t be as loud if they paid more competitive yields.

The reverse repo line feature has already been criticized during QT, with the BIS saying it has “lost its purpose.” For the banking group, the solution involves a change in the internal functioning of the mechanism, with the federal reserve reducing the returns it offers. He stated:

To reverse the gigantic suck of the reverse repo, all the Fed needs to do is lower the interest rate it pays.

What do you think of the reverse repo facility and its effect on bank deposits? Tell us in the comment section below.

Sergio Goschenko

Sergio is a cryptocurrency journalist based in Venezuela. He describes himself as someone who was late to the game, entering the cryptosphere when the price spike occurred in December 2017. With a background in computer engineering, living in Venezuela and being impacted by the cryptocurrency boom on a societal level, offers a different point of view. about the success of cryptocurrencies and how he helps the unbanked and underserved.

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