What are bank reserves and why is a shortage of them roiling a key interest rate at the nerve center of financial markets?
Bank reserves are normally obscure, even to bankers and professional investors. But this week they have hit the news when a shortage of them caused a key measure of borrowing costs—known as the overnight repo rate—to spike. That’s a worry, because typically these more wonky areas of finance only become interesting when something is going wrong.
The overnight repo rate, which is what banks and other financial players charge each other to lend cash in exchange for supersafe bonds, should be close to 2%, but it shot up almost...
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