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Banks keep money safe for people. People can put money into a bank and take it out later.
This one time, a long time ago, people went to the bank to get their money back and the banks said, "Oops, we don't have it anymore. We let someone else use your money for a little bit. But they haven't given us the money back yet. Can you please come back later?"
This made people mad. They didn't want to wait to get their own money.
So the people made a rule that said banks have to keep at least 10% of people's money around. This way, people can always have access to at least some of their money whenever they need it.
This is an old rule, before there were computers or whatever. As a result, this rule only looks at the amount of money a bank has at the END of the business day. (It's too much work to look during the day.)
This means banks can go below 10% cash on hand during the day, as long as the banks can get their cash back up to 10% before the end of the day.
However, some banks still end up going below 10% during the day and can't quite get it back up to 10% by the end. Maybe they only have 9%. Or 8% or whatever. These banks are "poor banks" because they don't have enough money to meet the angry people's rule.
How could this happen? Well, maybe some people were supposed to give money back to the bank today but they didn't. Or maybe too many people asked for their own money back from the bank than bank thought would ask. Whatever the reason, it happens. Some banks have less than 10% at the end of the day, which is bad because that's against the rules.
The opposite it also true. Some banks also have MORE money at the end of the day. Maybe like 11%. Or 12%. These are rich banks who ended up with more than they were expecting at the end of the day. It's OK to have more than 10%, but anything more than 10% is a missed opportunity to make more money. Because that's money "sitting idle" and not being used by someone productively like to buy supplies for a factory or whatever.
Anyhoo, some banks have 9%. Some 11%. But every bank wants 10% to meet the rules.
So banks realized they can loan each other money. Not for a long time, mind you. Just for overnight.
Remember, the angry people's rule only looks at the amount of money a bank has at the END of the day. So a bank can borrow the money it needs from another bank right before the end of the day and then give that money back at the start of the next day.
This way, the rule is always met even if mistakes are made. And no one needs to feel bad about having too little or too much. Because the banks with too much just give their money to the banks with too little. It's like socialism, only for banks.
In order for a bank with 11% to agree to give 1% to the bank with only 9%, however, the rich bank asks to be given an little bit extra. Like maybe an extra 2.25% of that 1% loan. Sometimes more, sometimes less. It depends.
Why does that number change? Well, if it turns out that most banks are poor banks, then that means there aren't enough rich banks to give them money. So the rich banks can charge more. A lot more. Like 10%, instead of 2.25%.
The angry people decided they didn't like this. Because life is already bad enough for a poor bank. Why make it worse?
So the angry people decided to let the people's central bank also make loans to the poor banks. Not all the time, of course. Only when the rich banks charge too much because there's too many poor banks in need. This way, there's competition in how much extra money the rich banks can ask for. It kinda helps to keep things consistent.
Today, that happened. And the central bank gave $54 billion to the poor banks. But don't worry; the poor banks will give that money back at the start of the day, just like they always do.
Thank you for literally explaining the entire situation like I'm actually 5 because I'm slightly more knowledgeable and less outraged than I was just by reading the headline, which is usually the healthier option.
See, this is why we need to get rid of the Fed. If we’d already done that, as so many Libertarians have said we need to do, this would have properly spiraled out of control, likely affecting multiple additional financial markets, maybe even precipitating a new crisis!
lol the cracks are not in the financial markets..... its in the people. you can try to make it as fair as can be and people will find ways to exploit it... gotta respect that humans are pretty ingenious when it comes to this shit.
Part of the 2008 crisis (and a lot of the bailout) was related to just the fear of not being able to turn overnight lending (commercial paper) for many of the banks and large companies to fund their day-to-day operations.
Without cash, everything falls apart very quickly.
20 minutes after today's repo operation began, it concluded and there was some bad news in it: as we feared, yesterday's take up of the Fed's repo operation which peaked at $53.2 billion has expanded substantially, and according to the Fed, today there was a whopping $80.05BN in bids submitted, and increase of $27 billion, or 50% more than yesterday.
It also meant that since the operation - which is capped at $75BN - was oversubscribed by over $5BN, that there were participants who did not get the last-minute liquidity they needed, and that the Fed will see demands to either expand the size of its operations, or implement a fixed operation and/or transition to permanent open market operations, i.e. QE
The Federal Reserve has a target federal funds rate of 2 to 2.25%. The actual rate went to 2.25% and was in danger of going over the targeted range. The reason it came within range was due to a shortage of cash. The shortage of cash was due to a few issues happening at once. Two big ones were:
Corporate quarterly taxes for September were being paid, so many corporations were moving large amounts of cash out of banks to the government.
During the Federal debt ceiling fight in Congress earlier this year, the government could not issue debt. Now that the fight is cleared up, the Government issued the backlog of debt. Banks buying the larger than normal government debt issuance caused their cash reserves to go lower than normal.
The NY Fed did a "repo" action, which essentially give banks a short term loan which can be secured by government debt - the same government debt from the large debt issuance that caused the low cash reserves. This repo action will give banks time to re-build cash reserves from normal business. The NY Fed may do more repo actions
You mean the IOER rate? It is fine in theory. It is higher now in practice compared to the federal funds rate than was envisioned I think, so it is not as neutral on the economy as it could be. I do not have the breadth of financial knowledge or the day to day information to presume to know better than the Federal Reserve what the rate should be.
Can someone confirm i got this right; The overnight lending market is exclusively for banks for short term credits, Banks make huge profits and swim in money atm but the rate is not supposed to be higher than x?
If i got this right, can someone explain to me .. WHY?