Thread by @jeuasommenulle

I’ve been really a stoic and (almost) managed not to tweet about that repo story, but considering the amount of bs I’ve been reading, it’s just too tempting to write

What has happened is simple: a small number of actors have seen a large amount of cash move around in an unexpected way (remember that on a very short term, cash just moves around, it doesn’t appear or disappear.)

This was triggered by all sort of things: MMF redemptions, oil shock, Fed meeting upcoming, TBill coupons, etc. Nobody knows for sure, not even the Fed or the Treasury😊

The fact that few people were impacted is clear from this chart which show the SOFR rates percentiles on the exact day of the shock.

Now you would say: why hasn’t the market settled this mismatch/movement of cash easily?

Two main reasons, basically.

Firstly, as @izakaminska pointed out very well, the Fed's decisions on cash injections are survey based, unlike the ECB, without an effective corridor. When the survey is wrong, shit happens. And some had pointed out that the survey was wrong.

@izakaminska Mr Dimon two weeks ago:

@izakaminska The Bank policy institute on Sept 3rd:
"over the next four weeks there is going to be a kerfuffle in money markets"

@izakaminska In the Eurozone, banks with collateral have unlimited access to funding and deposits at the ECB, it’s simple and guarantees no crazy pricing

@izakaminska Secondly (and this is what @NathanTankus touched upon in his good thread) the capacity of the banking system to absorb those shocks has reduced – and that’s not because banks have less cash!

@izakaminska @NathanTankus Pre-crisis banks had less than 10bn excess reserves at the fed! Now they have 1.4tn$! So you're saying they don't have enough cash ? 🤣And if this is going up or down it’s mostly because of QE/QT, nothing else. Banks have plenty of cash.

@izakaminska @NathanTankus What they want to do with this cash is another story: the min LCR ratio is 100%. If you’re a cautious bank manager, you want to be 10% above that, at least (maybe even more if your deposits are less sticky).

@izakaminska @NathanTankus And anything that will bring you below your security threshold has to be damn profitable! (Re-read Mr Dimon above.) The pain threshold has changed significantly

@izakaminska @NathanTankus And this chart from Autonomous shows you the excess above that 110% threshold

@izakaminska @NathanTankus The numbers are actually quite insane and ridiculously small for banks with that kind of balance sheet. Arguably the biggest private liquidity provider has 12bn$ of “free cash”. This is miscroscopic, almost non-statistically significantly different from 0 😊

@izakaminska @NathanTankus That’s not because JPM is cash strapped or in any kind of trouble – it’s just that they are drowning in cash but are not allowed to use it to fund a poor guy who miscalculated his cash balance on a big oil price swing day!

@izakaminska @NathanTankus if you want them to do a trade that brings them below their safety level, it better be more profitable than a 1d repo at 7% which will make you 100,000$ 😂

@izakaminska @NathanTankus So what’s the bottom line here? Because of inflated balance sheet and inflated liquidity regulations, the system is more prone to unexpected cash movements that are hard to absorb by the private system. The ECB handles this easily with the MRO/depo facilities.

@izakaminska @NathanTankus Maybe it's time for the Fed to wake up and adjust its policy ?