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Are Repo Markets Fragile? Evidence from September 2019
We show that the segmented structure of the U.S. Treasury repo market, in which some participants have limited access across the segments, leads to rate dispersion, even in this essentially riskless market. Using confidential data on repo trading, we demonstrate how the rate dispersion between the centrally cleared and over-the-counter (OTC) segments of the Treasury repo market was exacerbated during the stress episode of September 2019. Our results highlight that, while segmentation can increase fragility in the repo market, the presence of strong trading relationships in the OTC segment ...
The Financial (In)Stability Real Interest Rate, R**
We introduce the concept of financial stability real interest rate using a macroeconomic banking model with an occasionally binding financing constraint as in Gertler and Kiyotaki (2010). The financial stability interest rate, r**, is the threshold interest rate that triggers the constraint being binding. Increasing imbalances in the financial sector measured by an increase in leverage are accompanied by a lower threshold that could trigger financial instability events. We also construct a theoretical implied financial condition index and show how it is related to the gap between the natural ...
Atlanta Fed president discusses credit market instability
Recent turmoil in U.S. credit markets and its context within international financial markets were the subjects of two recent speeches by Atlanta Fed President Dennis Lockhart.
Fed vice chair Kohn encourages banks to work with less debt
Federal Reserve Vice Chairman Donald Kohn recommended that commercial and investment banks operate with less debt, saying that the financial system's increased stability will outweigh the costs.
Fed, Treasury issue joint statement on financial, monetary stability
The Federal Reserve and the U.S. Treasury recently addressed their joint role in preserving U.S. financial and monetary stability and the Fed's independence as a policymaking body.