Fed Launches Permanent Repo Facility as Financial Safety Net... Strengthening Liquidity Supply to Banks

SRF $50 Billion Scale... Possibly Announced Early Due to COVID-19

United States Federal Reserve (Fed)
Photo by EPA Yonhap News

[Asia Economy Reporters Byunghee Park, Sehee Jang] The U.S. central bank, the Federal Reserve (Fed), announced that it will begin operating a new liquidity provision tool called the Standing Repo Facility (SRF) from the 29th (local time), aimed at strengthening the crisis response capabilities of commercial banks.

According to The Wall Street Journal (WSJ), after concluding the Federal Open Market Committee (FOMC) meeting on the 28th, the Fed stated that it will operate the SRF by accepting U.S. Treasury securities, federal agency bonds, and federal agency mortgage-backed securities as collateral and lending short-term funds to primary dealers at an interest rate of 0.25%.

Primary dealers refer to large banks that trade directly with the U.S. Treasury. Banks can use the SRF to pledge Treasury securities and other collateral and borrow money at any time. This effectively secures an additional tool to respond when credit tightening occurs in the financial market.

The Fed also announced that it will open a separate SRF window not only for Wall Street banks but also for foreign central banks. The SRF lending limit has been set at $500 billion (approximately 575 trillion KRW). However, the Fed stated that it plans to increase the lending limit in the near term.

The introduction of the SRF by the Fed was anticipated, but the announcement timing was accelerated due to the COVID-19 pandemic. The Fed said, "Over the past two years, we have reviewed ways to effectively increase commercial banks' reserves by utilizing the repo market, and recently discussed specific implementation plans at the FOMC due to COVID-19."

The SRF can support the short-term funding market and act as a financial safety net during periods of rapid interest rate increases. John Williams, President of the Federal Reserve Bank of New York, said, "The SRF is expected to be rarely used under normal circumstances but will be helpful in credit tightening situations." This means that banks can smoothly secure liquidity during credit tightening, preventing market interest rates from soaring.

Meanwhile, the Bank of Korea stated that the possibility of utilizing the SRF is low because it has a currency swap agreement with the Fed. Korea’s explanation is that no additional measures are necessary since funds are procured through the currency swap. The Bank of Korea signed a currency swap agreement with the Fed on March 19 last year with a limit of $60 billion and extended the currency swap agreements twice for six months each on July 30 and December 17 of the same year.

This content was produced with the assistance of AI translation services.