Repo madness hits Wall Street
U.S. Senator Elizabeth Warren recalled last month’s dramatic developments in short-term finance markets, warning Treasury Secretary Stephen Mnuchin not to use the incident as an excuse to ease regulation in the industry..
Elizabeth Warren, the Democratic leader in the presidential race who intends to challenge Donald Trump in the 2020 elections, sent a letter to the US Treasury on Friday. In it, she asks Stephen Mnuchin’s opinion on what exactly caused the sharp rise in rates in the repo market, and expresses concern about the potential costs for businesses and consumers if tensions persist..
In a letter to the head of the Ministry of Finance, the senator pointed to the chaos in the repo market in mid-September and to the reasons that were associated with such problems as the rapid growth of payments for corporate taxes and settlements at auctions on government bonds, which are withdrawing money from the financial system that normally functions. uninterruptedly.
The monetary crisis in the system led to a sharp increase in overnight interest rates, while the repo rate briefly reached 10%.
Another group of questions related to banks. Warren, a member of the Senate Banking Committee, said she was concerned about attempts by Wall Street institutions to argue that liquidity ratios imposed after the financial crisis are too strict and impede the functioning of the lending market..
«The rules were designed so that banks have enough cash to meet their obligations in the event of another market crash, Warren writes. – Banks are reporting profits at record levels, and it would be terribly ironic if the inexplicable chaos in a small corner of the banking market triggered further loosening of the rules that protect the economy from these types of risks».
Fed officials find out why banks were reluctant to enter repo markets during September rate hike.
«They have to think about the rules, liquidity coverage ratios, Basel 3, all the rules that have been imposed on banks so that they do not give out their money to make sure they are very liquid and have a high level of capital, ” said James Bianco, head of Bianco Research. – This needs to be resolved so that you do not overshoot the market».
Warren’s letter highlighted Mnuchin’s role as head of the Financial Stability Oversight Board.
She posed three questions that she would like to be answered by November 1, focusing on the reasons for the sharp increase in borrowing rates, why the New York Fed expanded its activities to address financing issues, and find out – what the FSOC will do with data it collects on repo transactions.
«I am not questioning the Fed’s actions in New York, but I am writing to find out why they were necessary and the consequences of the spikes.», – Warren wrote.