Disruption in the Repo Market - a Sign of Systemic Issues

The Repurchase Agreement (repo) market is an essential part of the financial system. Thus, a disruption in the repo market in September of 2019, leading to the first Federal Reserve intervention since the Global Financial Crisis, sowed panic. This paper discusses some of the possible explanations of the repo crisis, such as tax payments draining liquidity at the same time as the Treasury bonds were settled, changes in regulations leading to inability to use the reserves on the market, a problem of market domination and change in behavior of the non-bank participants. It builds on the theories of the economist Hyman Mynsky and examination of the Global Financial Crisis by the economist Thorvald Grung Moe in order to provide some background and examine the role of the repo market in the crisis of 2008. The paper discusses changes the market has undergone since the crisis and underlines issues that have persisted such as market domination of “too big to fail” institutions, no separation between essential and non-essential banking, shadow banking and its role on the repo market. It reaches a conclusion that the disturbance in the repo market might have been yet another consequence of evolution of the financial markets away from relationship banking and towards market-based liquidity provision