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5 Tuesday, October 1, 2019 18:59

Too big to lend? JPMorgan's cash tweaks take toll on U.S. repo

NEW YORK (Reuters) - JPMorgan Chase & Co (JPM.N) has become so big that some rival banks and analysts say changes to its $2.7 trillion balance sheet were a factor in a spike last month in the U.S. “repo” market, which is crucial to many borrowers.
FILE PHOTO: A J.P. Morgan logo is seen in New York City, U.

S. January 10, 2017. REUTERS/Stephanie Keith/File PhotoRates in the $2.2 trillion market for repurchase agreements rose as high as 10% on Sept. 17 as demand for overnight cash from companies, banks and other borrowers exceeded supply. While not seen as an sign of distress as it was during the collapse of Bear Stearns and Lehman Brothers in 2008, the spike did prompt the U.

S. Federal Reserve to promise to lend at least $75 billion each day until Oct. 10 to relieve the pressure. Analysts and bank rivals said big changes JPMorgan made in its balance sheet played a role in the spike in the repo market, which is an important adjunct to the Fed Funds market and used by the Fed to influence interest rates.

Without reliable sources of loans through the repo market, the financial system risks losing a valuable source of liquidity. Hedge funds, for example, use it to finance investments in U.S. Treasury securities and banks turn to it as option for raising suddenly-needed cash for clients. Publicly-filed data shows JPMorgan reduced the cash it has on deposit at the Federal Reserve, from which it might have lent, by $158 billion in the year through June, a 57% decline.

Although JPMorgan’s moves appear to have been logical responses to interest rate trends and post-crisis banking regulations, which have limited it more than other banks, the data shows its switch accounted for about a third of the drop in all banking reserves at the Fed during the period. “It was a very big move,” said one person who watches bank positions at the Fed but did not want to be named.

An executive at a competing bank called the shift “massive”. Other banks brought down their cash, too, but by only half the percentage, on average. For example, Bank of America Corp (BAC.N), the second-biggest U.S. bank by assets, with a $2.4 trillion balance sheet, took down 30% of its deposits, a $29 billion reduction.

“All of the banks were doing this to a degree,” said one Wall Street banking analyst, requesting anonymity because he was not authorized to speak on the record, adding: “JPMorgan does look like an outlier here”. (GRAPHIC - Bank reserves held at the Fed: here) POST-CRISIS RULES In the past JPMorgan would have gladly seized the opportunity to lend cash in the repo market, where loans are backed by the best collateral, often U.

S. Treasury securities. But on Sept. 17 even as the majority of repo loans were being made at 5% and above, twice the usual rates, JPMorgan was limited in how much cash it could provide because of regulatory and other constraints, a person familiar with the trading said. The spike in rates reflected.

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News Code: 371601  |  Reuters
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