Barclays: US liquidity conditions and funding stresses could push Fed to Standing Repo Facility

Concerns over liquidity conditions and funding stresses could encourage the creation of a standing repo facility (SRF), which would permit banks to convert Treasury holdings to reserves on-demand at a predetermined rate, said Barclays researchers in a recent report.

During normal times, the SRF could encourage banks to hold fewer reserves, since Treasuries generally earn more than interest on reserves. The facility would also ensure that banks could fully – and, importantly, immediately – monetize their Treasuries.

In periods of stress, when banks may be inclined to hold on to their most liquid balances, knowing that they could easily repo their Treasuries to the Fed throughout the day might make managers more willing to lend out their cash balances. In theory, the SRF would not suffer from the stigma associated with discount window borrowing and might become a complement to the Fed’s existing overnight and term repo facilities.

That said, the committee has not yet reached agreement on basic facility design, such as which entities would be eligible to use the SRF and at what rate. The creation of a standing repo facility may not be high on the Fed’s to-do list during a stress event, as it has other, more direct, ways to increase market liquidity.

In February, the Fed’s vice chair for Supervision, Randal Quarles, suggested in a speech that the discount window, not SRF, will meet bank liquidity needs. At the same time, September’s repo market turmoil brought the issue back into the spotlight as periods of volatility tend to do.

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