The New York Fed only makes deposits with primary merchants. These are major New York banks that agree to participate in the Fed`s day-to-day transactions. In this way, the banks` reserves are well written. This gives banks more money for loans and thus reduces interest rates. A pension contract (repo) is a short-term sale between financial institutions in exchange for government securities. Both parties agree to cancel the sale in the future for a small fee. Most depots are available overnight, but some can stay open for weeks. They are used by companies to raise funds quickly. They are also used by central banks. Repo is a form of guaranteed loan. A basket of securities serves as an underlying guarantee for the loan.
Securities law is transferred from the seller to the buyer and returns to the original owner after the contract is concluded. The most commonly used guarantees in this market are U.S. Treasury bonds. However, government bonds, agency securities, mortgage-backed securities, corporate bonds or even shares can be used in a repurchase transaction. The Federal Reserve uses repo and reverse-repo operations to manage interest rates. In practical terms, it maintains the federal funds rate within the target range set by the Federal Open Market Committee (FOMC). The Federal Reserve Bank of New York conducts the transactions. If the purpose of the repoe is to borrow money, it is not technically a loan: the ownership of the securities in question actually comes and goes between the parties involved.
Nevertheless, these are very short-term transactions with a guarantee of redemption. Unlike a guaranteed deposit, assets must be sold immediately. Although pension loans are safe because they are covered by government bonds, the securities may lose value, which hinders the buyer`s investments. Reuters. “The Fed has a repo problem. What is it? Access august 14, 2020. When the Federal Reserve`s open market committee intervenes in open market transactions, pension transactions add reserves to the banking system and withdraw them after a specified period; Rest first reverses the flow reserves, then add them again. This instrument can also be used to stabilize interest rates and the Federal Reserve has used it to adjust the policy rate to the target rate.  Once the real interest rate is calculated, a comparison between the interest rate and the interest rate for other types of financing will show whether the pension contract is a good deal or not. In general, pension transactions offer better terms than money market cash loan agreements as a secure form of lending.
From a renu possibly`s point of view, the agreement can also generate additional revenue from excess cash reserves. According to Yale economist Gary Gorton, the repo has grown to offer large non-depository financial institutions a guaranteed lending method that matches deposit insurance provided by the government in the traditional banking sector, with guarantees being a guarantee for the investor.  In the case of a reverse repurchase transaction, the opposite happens: the desk sells securities to a counterparty, subject to a repurchase agreement at a later date at a higher repurchase price. Reverse pension operations temporarily reduce the amount of reserve balances in the banking system. When the government is in a budget deficit, it borrows by issuing government bonds.