How the Federal Reserve Is Now Competing With Banks for Deposits: Enter the Reverse Repo Facility

How the Federal Reserve Is Now Competing With Banks for Deposits: Enter the Reverse Repo Facility

The U.S. Federal Reserve could be competing with commercial banks due to a facility called the “overnight reverse repurchase agreement facility,” which has currently drawn in more than $2 trillion in deposits. According to analysts, this has affected bank deposits, as investors run to grab the higher yields it offers compared to traditional banks. The Federal Reserve ‘Reverse Repo’ Facility Is Affecting Banks’ Deposits, According to Analysts

The recent banking crisis has made people worried about the security of the U.S. banking system, and while at a high level, some are still determining the causes that led to the fall of Silvergate, Signature, and Silicon Valley Bank, there is another phenomenon that is affecting the health of this system.

The “overnight reverse repurchase agreement facility,” or reverse repo, as it is commonly referred to, allows money market funds, which are investment vehicles known to invest in low-risk instruments, to park money with the U.S. Federal Reserve while earning greater interest than what commercial banks offer.

The facility, which was introduced back in 2013 by the Federal Reserve as a backstop for a possible shortage of low-risk investment options in the market, finished last month with $2.3 trillion in funds, down from a record number of $2.5 trillion reached in December 30, 2022, per numbers of the St. Louis Fed.

Analysts have stated that the availability of this instrument is causing flight-to-quality flows away from bank deposits, which have come down by almost $126 million in the weeks following the bank crisis, marking the biggest drop since June 2021. The Bank Policy Institute (BPI), a research membership group for U.S. banks, stated: While money funds also invest in Treasury bills, when they pile into bills, bill yields call, reducing their attractiveness. It is only the reverse repo with its yields that is insensitive to supply and demand, that serves as a black hole for bank deposits. Proposed Solutions to the Issue

This “black hole,” as the BPI called it, has a relatively simple solution, according to some. According to an article from Axios, this is a problem of returns, as the banks are not competing with the Federal Reserve, offering fewer yields, and ones not as attractive to investors. Neil Irwin, chief economic correspondent at Axios stated: The sucking sound of money leaving banks would not be so loud if they paid more competitive returns.

The function of the reverse repo facility has already been criticized during quantitative tightening, with the BPI stating that it has “lost its purpose.” For the banking group, the solution involves a change in the inner workings of the mechanism, with the federal reserve diminishing the returns it offers. It stated: To reverse the giant sucking of the reverse repo, all the Fed need do is lower the interest rate it pays. Tags in this story Axios, Bank crisis, bank policy institute, deposits, Federal Reserve, Interest, Signature, Silicon Valley Bank, Silvergate, U.S.

What do you think about the reverse repo facility and its effect on bank deposits? Tell us in the comment section below. Sergio Goschenko

Sergio is a cryptocurrency journalist based in Venezuela. He describes himself as late to the game, entering the cryptosphere when the price rise happened during December 2017. Having a computer engineering background, living in Venezuela, and being impacted by the cryptocurrency boom at a social level, he offers a different point of view about crypto success and how it helps the unbanked and underserved. US-Saudi Tensions Escalate as Report Says Crown Prince Is No Longer Interested in Pleasing the United States  ECONOMICS | 4 hours ago Report: Zambian Currency Poised for First Quarterly Decline Since 2020 ECONOMICS | 12 hours ago

Image Credits: Shutterstock, Pixabay, Wiki Commons, AVM Images / Shutterstock.com Previous articleAlleged Kenyan Bill Proposes Widening Definition of Securities to Include Crypto Assets Next articleReport: Zambian Currency Poised for First Quarterly Decline Since 2020 Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article. Read disclaimerShow comments More Popular NewsIn Case You Missed ItFidelity Investments Launches Crypto, Metaverse ETFs — Says "We Continue to See Demand"

Fidelity Investments, one of the largest financial services firms with more than $11 trillion under administration, is launching exchange-traded funds (ETFs) focusing on the crypto ecosystem and the metaverse. "We continue to see demand, particularly from young investors, for access ... read more.SEC Risks Violating Admin Procedure Act by Rejecting Spot Bitcoin ETFs, Says Grayscale Bitcoin ATM Operator Indicted in New York Allegedly Running Illegal Business Attracting Criminals UAE Airliner Emirates to Launch NFTs and Experiences in the Metaverse Ethereum Foundation"s Financial Report Discloses It Holds $1.6 Billion in Assets, 80.5% Held in Ether