The financing markets that help ease most U.S. debt trading are showing signs of stabilizing after shrinking by almost 50 percent since the financial crisis.
The amount, known as shadow banking, was US$4.124 trillion in February and averaged $4.139 trillion over the past three months, according to data compiled by the Center for Financial Stability, a nonpartisan research group. The measure, which includes money-market funds, repurchase agreements, and commercial paper, all adjusted for inflation, peaked at $7.61 trillion in March 2008.
"The flicker of good news is that we are starting to see a bottom form and hopefully we will start to see a recovery," Lawrence Goodman, president of the New York-based the Center for Financial Stability. "The damage is done, and we still have a long ways to go for there to be re-engagement of market finance in the economy. The economy has been growing substantially below potential, in part because market finance has failed to provide the fuel to the economy."
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Federal Reserve officials last week cut their economic growth estimate for the fourth quarter from a year earlier to 2.3 percent to 2.7 percent, down from as much as 3 percent in December. Inflation will range from 0.6 percent to 0.8 percent at the end of this year, policy makers forecast, down from a range of 1 percent to 1.6 percent projected in December.
Global regulators have focused on reducing the footprint of shadow banking, which was viewed as a catalyst for the collapse of Lehman Brothers Holdings Inc. in 2008 that shook markets worldwide. In the process, market finance contracted to a degree that starved financial markets of liquidity and was detrimental to growth, according to the CFS.
Repo agreements are a source of short-term finance for banks, allowing them to use securities as collateral for short-term loans from investors such as other banks or money-market mutual funds.
The amount of securities financed through a part of the market known as tri-party repo averaged $1.62 trillion as of Feb. 10, compared with $1.58 trillion in January and down from $1.96 trillion in December 2012, according to data compiled by the Fed.
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