October 22, 2019

Senator Warren Questions Secretary Mnuchin About Volatility in Overnight Lending Market

Fed's Intervention is Unprecedented Since the 2008 Financial Crisis

Warren Also Raises Concerns Big Banks are Citing Repo Market Fluctuations to Pressure Fed to Roll Back Post-Crisis Reforms

Text of the Letter (PDF)

Washington, D.C. - On Friday, United States Senator Elizabeth Warren (D-Mass.), sent a letter to Treasury Secretary Steven Mnuchin, who also serves as Chair of the Financial Stability Oversight Council (FSOC), requesting information about recent turmoil in the overnight market for repurchase agreements (repo market) and the Federal Reserve Bank of New York (New York Fed)'s response to this volatility. The FSOC is responsible for identifying and responding to emerging risks to the stability of the nation's financial system.

In September 2019, borrowing rates for overnight repurchase agreements (repo rates), which banks pay when they borrow money to meet their short-term obligations, jumped approximately fivefold. In response to the rate spike, the New York Fed began cash injections into the repo market and subsequently announced that the Open Market Trading Desk would offer overnight operations on a daily basis to provide banks with sufficient short-term funding until October 10, 2019. During the first week of October, the New York Fed announced that these operations would continue until at least November 4, 2019, and in a subsequent announcement said it would extend them through January 2020.

In her letter to Secretary Mnuchin, Senator Warren noted that the last time such market interventions occurred was during the 2008 financial crisis, and questioned whether this recent market volatility indicated any larger threat to financial stability.

"While the Federal Reserve has taken the necessary action to ensure that markets continue to function, I am alarmed that it has been required to engage in money market interventions that have not been used since the 2008 financial crisis, and I write to obtain your understanding of the underlying causes of this fluctuation in the market and how you plan to mitigate them," Senator Warren wrote.

The senator also expressed concern that large U.S. banks may be using the recent chaos in the repo market as an opportunity to pressure the Federal Reserve to ease liquidity requirements, such as the liquidity coverage ratio, which they have long opposed, and that the FSOC might support these efforts.  The Board of Governors of Federal Reserve System, in conjunction with the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency, imposed these rules after the 2008 crisis to ensure that banks have enough cash on hand to meet their obligations in the event of another market crash.

"Banks are reporting profits at record levels, and it would be painfully ironic if unexplained chaos in a small corner of the banking market became an excuse to further loosen rules that protect the economy from these types of risks," the senator continued.

To address her concerns, Senator Warren asked Secretary Mnuchin a series of questions about the causes of this market fluctuation and requested the FSOC provide additional information regarding underlying risks to the financial sector. She requested a response by November 1, 2019.