The collapse of repurchase agreements—"repos" as they are known on Wall Street—signaled the beginning of the financial crisis, and there's trouble brewing in the market again.
Banks are retreating from repos as new regulations tighten controls on the types of risks they're allowed to take and make the trade more expensive, according to a report in The Wall Street Journal.
The practice involves short-term funding in which a hedge fund raises cash by selling securities to banks, which in turn sell to a third party—usually a money market fund—that then sells the bond back at a higher price and pockets the profit. While the process worked well for years, it collapsed when liquidity concerns surfaced at former Wall Street titans Bear Stearns and Lehman Brothers in 2008.
Now, big players such as Goldman Sachs and Barclays are slashing the money they are pumping into the repo market, which essentially acts as a short-term lender to institutions that rely on it.
While regulators hail the changes to the repo market, one analyst quoted by the Journal said a slower repo market could increase market volatility when interest rates start rising.
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