Don’t Use Repo Volatility as a Reason to Roll Back Bank Regulations

As the end of the year approaches, the Federal Reserve is watching the Treasury repo market closely and pouring in liquidity, hoping interest rates don’t spike again as they did in September, briefly affecting monetary policy tools and raising questions about market liquidity. Although broader macroeconomic problems stemming from repo market uncertainty seem unlikely, some Wall Street banks and their advocates appear to be seizing on the market volatility as a pretext to attack post-crisis rules that they have long disliked. The Federal Reserve Board should resist these attacks and not weaken critical standards that have made the system safer.

In September, demand for overnight cash to fund Treasury positions at some financial firms exceeded the amount of cash being offered by the biggest banks and money-market funds, causing interest rates in the repo market to rise briefly to unanticipated levels. The Fed stepped in and the market calmed down. Some were quick to blame this turbulence on stronger post-crisis regulatory standards for the largest banks, which, as the argument went, stopped them from providing more cash to fund overnight Treasury repos. These critics cited various culprits, individually or in combination: liquidity regulations and supervision; capital standards, including stress-testing capital thresholds; and requirements for so-called living wills. Yet what has been missing from their claims is compelling evidence that any of those played a material role in the repo market volatility.