Banks fail to match the Fed’s latest repo operation, showing weaker demand for the capital injections

Fed Chair Jerome PowellAP/Mark Lennihan

The Federal Reserve Bank of New York’s latest market repurchase agreement, or repo, operation was undersubscribed by banks, signaling lenders’ demand for cash injections is softening.

Primary lenders called for $18 billion from the Fed’s 14-day repo on Thursday, falling under the $35 billion set aside for the day’s offering. The operation was the third in recent days to exceed banks’ demand.

The Fed also offered an overnight repo on Thursday with a $120 billion limit. Banks called for only about $29 billion in bids, hinting that lenders’ balance sheets could be meeting capacity after months of capital injections.

Previous operations saw healthy demand as banks rushed to fortify their cash reserves. Many repos saw lenders called for twice the amount of capital made available by the Fed.

The central bank has already added more than $200 billion to money markets through its repo operations. The capital injections began on September 17 after the Fed’s overnight lending rate spiked to 10% from its intended 2% window. The bank has also been buying Treasury bills to further ease stress on the money market.

The undersubscribed repos also arrive ahead of recently bolstered operations at the end of the year. The Fed boosted its planned repos scheduled between December 31 and January 2 to a $150 billion cap from the previous $120 billion level, according to a December 12 release. The central bank plans to offer more than $260 billion in repos through the last week of December.

The increased supply is likely meant to calm heightened stress from banks’ year-end lending activity. Legislation passed after the financial crisis obliges firms to hold a certain amount of free cash as emergency reserves in case of a liquidity scare. Evaluations at the end of each year assess how liquid a bank’s reserves are and dictate how much cash they must set aside. Lenders typically lend less cash out ahead of the tests as they look to pad their reserves and prove liquidity to regulators.

The updated repo limit is “to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures around year end,” the bank said in a statement.

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