Why Do Banks Use Repurchase Agreements

16 Dub , 2021 Nezařazené

Since a repurchase agreement is a method of selling/buying back loans, the seller acts as a borrower and the buyer as a lender. The guarantee refers to securities sold, which are usually from the government. Pension loans provide rapid liquidity. Beginning in late 2008, the Fed and other regulators adopted new rules to address these and other concerns. One consequence of these rules was to increase pressure on banks to maintain their safest assets, such as Treasuries. They are encouraged not to borrow them through boarding agreements. According to Bloomberg, the impact of the regulation was significant: at the end of 2008, the estimated value of the world securities borrowed was nearly $4 trillion. But since then, that number has been close to $2 trillion. In addition, the Fed has increasingly entered into repurchase (or self-reversion) agreements to compensate for temporary fluctuations in bank reserves.

In a pension room, the investor/lender makes cash available to a borrower, the loan being secured by the borrower`s guarantees, usually bonds. If the borrower becomes insolvent, the guarantee is granted to the investor/lender. Investors are generally financial enterprises such as money funds, while borrowers are non-intrusive financial institutions, such as investment banks and hedge funds. The investor/lender calculates an interest rate called „pension rate“ $X the granting of loans and recovers a higher amount $Y. In addition, the investor/lender may demand guarantees that require a value greater than the amount he lends. This difference is the „haircut.“ These concepts are illustrated in the diagram and in the equations section. If investors are at greater risk, they may charge higher pension interest rates and demand higher reductions. A third party may be involved to facilitate the transaction; In this case, the transaction is called a „tri-party deposit.“ [3] The main difference between a term and an open pension is between the sale and repurchase of the securities. The parties agree to cancel the transaction, usually the next day.

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