Standing Repo Facilities, Then and Now



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Summary:

Recently there have been discussions, both within the FOMC and more broadly, about whether the FOMC should set up a standing repo facility. Such a facility would allow banks to sell safe assets (U.S. Treasury securities) to the Fed, with the assurance of subsequent repurchase, in unlimited quantities at an administered rate. This is not a new idea. In fact, a similar facility was implemented in 1683 by the Bank of Amsterdam, the leading central bank of the time, and operated for more than a century afterward. In this article, we describe the motivations, operations, and limitations of the Bank of Amsterdam's facility and what lessons this historical experience offers for modern-day central banks.

Key findings:

  • A standing facility can deepen markets for both collateral and reserves but can be vulnerable to large swings in its usage.
  • A central bank may wish to offset (or "sterilize") such swings and these offsets may increase the central bank's need to engage in other types of market operations.
  • In tail events, the scale of this sterilization can undermine a central bank's own credibility.

https://doi.org/10.29338/ph2020-01



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