No obvious disaster looms. But turmoil on the repo market suggests that dangers may lurk in some hidden corner of the financial system
who lived through the global financial crisis, trouble in the market for repurchase agreements, or repos, induces a cold sweat. During the week of September 16th the repo market—the epicentre of the crisis 12 years ago—ran short of liquidity, forcing the Federal Reserve to intervene suddenly by injecting funds. By the following week fears of a reprise of the global crisis were easing, though banks remained eager recipients of Fed liquidity.
These twin woes were amplified by the global financial system’s interconnectedness. Cross-border capital flows soared in the years before the crisis, from 5% of globalin 1990 to 20% in 2007, spreading financial excess and outstripping regulators’ capacity for oversight. Money from around the world poured into America’s mortgage market, and the resulting pain was correspondingly global.
Just as the threat of bank runs migrated from depositors to money markets, so systemic risk may now be building up in non-bank institutions. Investment funds, pension managers and insurance companies have been eager buyers of securitised bank loans. As recently noted by Brad Setser of the Council on Foreign Relations, an American think-tank, some have begun to take on an ominously bank-like maturity mismatch.
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