There has been a lot of discussion regarding quarter end repo spikes as dealers reduce their balance sheet. I've been reading it all over Bloomberg and I saw overnight GC as high as 3.6% on my screens. Is this the result of banks pulling funding from repo (i.e. not lending cash and taking in collateral) due to regulation? What's the penalty if they don't reduce balance sheet? Why don't borrowers just lock in a longer term repo rate so they're not exposed to these funding costs?

Lastly, I learned that it also helps that the new Treasury securities (2y, 5y, and 7y) auctioned this past week settles on 4/1. Since this is after quarter-end, it would not be included in the regulatory calculation. In addition, there's no exchange of cash until 4/1 since these issues are purchased on a when-issued basis.


1 Answer 1


All banks have limitations on accounting balance sheet usage. The sensitivity is increased on quarter end dates, which are used to calculate various profitability measures such as return on assets. Usually a limit for each quarter end is imposed internally by management.

Because of these limits, banks make less funding available and therefore the overnight repo rate at month end can get unstable. Borrowers understand this and some of them do term out their borrowing, but not all. Some prefer to take the risk- after all , not all quarter ends have been volatile. It’s true that bonds settling 4/1 will not be on March end balance sheet.


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