REPO

These days, you need a car to get by. But they don’t come cheap.

The Federal Reserve is continuing to provide support for short-term bank funding, as it will institute another $500 billion repo operation Tuesday afternoon amid intensifying funding pressures. In the latest operation, the Fed will conduct another operation that comes on top of a similar offering Monday. The central bank's New York trading desk has been aiming to quell disruptions in the overnight funding markets where banks go to get operating capital. The minimum bid for the repo operations as been 0.1%. The repo operations follow other liquidity measures from the Fed aimed at getting banks to keep money moving through the economy.

In a mid-day announcement, the New York Fed said it will conduct a $500 billion repo operation this afternoon, another move targeted at keeping money flowing through the system. Repo involves banks putting up high-quality collateral like Treasurys in exchange for the liquidity they need to conduct operations. Monday's move comes after the Fed stepped up the operations last week, offering up to $1.5 trillion to an industry hungry for the Fed's offerings. The Fed also announced a round of asset purchases totaling $700 billion along the lines of its quantitative easing measures taken during the crisis. In Monday morning operations, the New York Fed trading desk bought $27 billion of Treasurys.

A mid-September cash crunch led to a spike in very short-term rates in the repo markets, where banks exchange high-quality collateral for cash with an agreement to buy back those assets with interest. "The resulting drain and swings in reserves are likely to have reduced the cash buffers of the big four banks and their willingness to lend into the repo market." Specifically, in the event that the Treasury continues to draw reserves down, banks will be unlikely to want to release theirs. "If it persists for a prolonged period, it may result in hysteresis effects that hamper market functioning," the BIS researchers said. "For instance, the internal processes and knowledge that banks need to ensure prompt and smooth market operations may start to decay."