/biz/ - Business & Finance

Since no one answered seriously, I’ll answer.

Overnight REPO is the market where banks lend each other money and settle up the next day. Say I’m a bank and need money to cover my lending operations, so I go to the REPO markets to trade some corporate bonds, TBills or other securitized instruments for cash. The problem is no bank wants to lend my cash either because 1. They don’t have it or 2. They consider the risk to be too high.

Ok so, banks won’t lend each other money, we’ve determined that.

The FED then goes into the REPO market and offers to buy their TBills and MBSs for the principle and then they just wipe the interest that was owed on the TBill. So now the banks have the cash, or liquidity, to lend to each other.

Tl;dr The FED buys junk shit and tbills after the market blows up. The banks make profit on the way up and when it explodes, they just trade cash convertibles and junk shit for FED liquidity.