A Financial Institution Engages in a Repurchase Agreement or Repo - Accounting and Finance Assignment Help

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During normal times: securities

• A central bank' s securities might be its holdings of its government, s bonds.

• The Federal Reserve System holds U.S. Treasury bonds and bills for monetary policy purposes and it buys and sells them as part of its open market operations.

• The Maastricht Treaty prohibits the Eurosystem from buying government debt in the primary issuer market and before the recent crises it was generally believed that buying government securities in the secondary markets was a violation of the spirit of the treaty Therefore, before the crisis it did not hold securities for monetary policy purposes. 
 

Repos and reverse repos 
• A financial institution engages in a repurchase agreement or repo when it sells securities to a counterparty and then agrees to repurchase them from the same cotmtetparty at a specified date and time: this is equivalent to collateralized borrowing.

• A financial institution engages in a reverse repurchase agreement or reverse repo when it buys securities from a cotmterparty and then agrees to resell them to the same counterpart): at a specified date and time: this is equivalent to collateralized lending.

• \Vhen a financial institution conducts a repo operation with another financial institution, that other financial institution is conducting a reverse repo. 
Loans and related operations 
• Central banks often make monetary policy by borrowing and lending. • In normal times, most of their loans are short-term collateralized loans and the required collateral is high quality, say, government debt.

• They also engage in reverse repos. When they do this they temporarily buy securities. These securities are also high quality, say government debt. • The Fed, viewing things from the cotuiterparty' s point of view, refers to its reverse repos as repos. Thus, what the Eurosystem calls reverse repos, the Fed calls repos. 
 

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