Banks’ demand for short-term cash wanes in Fed’s latest repo operation
Bank’s demand for short-term cash from the Federal Reserve Bank of New York waned on Friday, with just $49bn in two-week loans requested of the $60bn on offer.
The New York Fed also conducted an operation for overnight loans, with just $22.7bn borrowed by the banks out of a total $100bn on offer today.
The cash injections by the New York Fed are an attempt to soothe short-term lending markets going into the end to the third quarter. This is when banks typically pull back from lending in the these market as they seek to tidy their balance sheets ahead of important regulatory reporting dates, potentially boosting demand for cash as well as spurring volatility.
The lower demand seen on Friday is the first time the two-week repurchase agreement — where treasuries or other high quality collateral are exchanged for cash, or ‘repo’ for short — operation has been undersubscribed this week. Two similar operations on Tuesday and Thursday maxed out, prompting the New York Fed to increase the amount on offer today.
The operation works by banks submitting bids to borrow the cash above a minimum interest rate. Friday’s auction ended with an average interest rate of 1.87 per cent — the lowest of the three two-week operations so far.