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Big U.S. banks’ reluctance to lend may have caused repo-market shock: BIS

An unwillingness among the four leading U.S. banks to lend cash, combined with a surge in demand from hedge funds for secured funding, could explain the spike in U.S. money market rates and the sudden stress in the repo market beginning in September, the Bank for International Settlements said in a report dated Monday. Cash available to banks for short-term needs, also known as the repo market, all but disappeared in September, and some rates shot as high as 10% on certain overnight loans, which forced the Federal Reserve to make an emergency injection of billions of dollars for the first time since the global financial crisis roughly a decade ago. The major banks were not named in the report. The researchers conceded that the exact cause of the sudden stress is unknown but they reasoned that the factors could have ranged from large withdrawals for quarterly tax payments to the knock-on effects of sizeable trades in U.S. Treasuries. The BIS analysts emphasized that a growing over-reliance on the biggest U.S. banks to keep the repo market functioning may have been the leading factor. The Fed’s ongoing efforts to shore up the short-term repo lending markets have begun to rattle some market experts, as interventions have stretched to a third month.

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