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What is the repo market, and why does it matter?

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What is the repo market, and why does it matter?

Brookings Institution,

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The repurchase agreement market is crucial to the financial system, albeit under the public radar.

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8

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  • Analytical
  • Background
  • For Beginners

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Early in 2020, repurchase agreements, or repos, were getting a great deal of attention from financial professionals and markets. In this accessible overview, experts Jeffrey Cheng and David Wessel tell you why you need to know about this mechanism for financial stability. The authors explain how financial institutions rely on repos to manage their cash and how the Federal Reserve uses them to conduct monetary policy, particularly since the 2008 financial crisis.

Summary

The repurchase agreement market calibrates institutional cash holdings and Federal Reserve-targeted interest rates.

Repurchase agreements, or repos, are short-term loans by which financial institutions sell collateralized securities in a contract to buy them back at a higher price at a later time, typically the next day. The difference between the transaction prices serves as the loan’s interest, called the “repo rate.” In a “reverse repo,” securities buyers agree to sell the instruments back for a gain. The repo market is valuable to banks because it allows them to manage their cash holdings by borrowing inexpensively or profiting from a low-risk loan. Repos and reverse repos are in the Federal Reserve’s monetary policy toolbox to help...

About the Authors

Jeffrey Cheng is a researcher with the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy, headed by David Wessel. 

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