US banks ready to use Fed funding mechanism, Standing Repo Facility, that has been dormant for over two years

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Norbolsa| Banks are finally signing up for a US Federal Reserve funding mechanism that has been largely dormant for more than two years, putting them in a stronger position to cope with any stress. It is unclear, however, whether they will want to use it in the event of a crisis. The Standing Repo Facility allows banks to borrow emergency overnight cash from the Federal Reserve through a repurchase agreement, or repo, using Treasury securities and agency mortgage securities as collateral.

Some market participants and researchers noted that the reluctance is due in part to concerns that it could create a stigma, as borrowing from the Fed in a crisis could be seen by investors and bank examiners as a sign of liquidity or other problems.

It is expected that liquidity may become scarce in the coming months as the Fed withdraws hundreds of billions of dollars of excess cash from the financial system as it removes pandemic-era stimulus. First Citizens Bank is the most recent addition, while Silicon Valley Bank, for example, was not prepared to access the Fed’s discount window, which contributed to its failure.

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