New York Fed to expand list of banks for reverse repurchases

March 8, 2010 by · Leave a Comment
Filed under: Credit News 

This is a good sign to see this liquidity drained from the system but the big question is what will happen to the banks taking back the “toxic assets” that were purchased during the crisis.  First off, some real accounting will need to be made on the actual values of those securities.

The real estate market is no where near the peak so most of those will require write-downs to reflect the fair-market value (FMV).  We will need to follow this closely to see how this arrangement is handled and see what the banks are putting on their balance-sheets.

Reuters, New York – The U.S. Federal Reserve is taking an additional measure to lay the groundwork to drain excess bank reserves, as it seeks to remove some of the $1 trillion in cash it injected during the global credit crisis.

The New York Federal Reserve, which conducts open market operation for the U.S. central bank, said on Monday it has begun a program to expand the number of firms for conducting reverse repurchase agreements, including domestic money market mutual funds.

It said the announcement should not be read as a signal for changes or timing in overall monetary policy.  Reverse repos, which traders call them, are a tool that the U.S. central bank has said it will use to drain excess reserves, which some economists worry will become inflationary if left in the system for too long as the economy recovers.

Under reverse repos, the New York Fed sells securities to certain financial firms for later repurchase. Traditionally, it transact the operations with primary dealers on Wall Street.

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