Throughout 2019, banks' end-of-quarter tidying of their balancesheets has resulted in spikes in the U.S. overnight repurchaseagreement (repo) rates. This volatility has set the market on edge. The Federal Reservestepped in, with traders injecting cash into U.S. money markets. Asa result, the last day of the third quarter (Monday) was relatively uneventful in the repo market.

Still, this year's market volatility signals a broader risk. Asa recent report from Fitch Ratings puts it: "While the Fed wasultimately able to stabilize repo dollar funding rates throughad-hoc funding infusions, further repo-market volatility couldexacerbate global liquidity issues, potentially extending to otherasset classes and players beyond the U.S. repo market."

Large banks shouldn't be much affected, both because theirrequired liquidity coverage ratios lead to close matching of repoassets and liabilities, and because they rely more on retaildeposit funding than on wholesale funding sources. However, smallerbroker-dealers, mortgage real estate investment trusts (REITs), andhedge funds may be hit hard if borrowing costs in the repo marketspike and remain high. Exposure to a volatile market for fundingmight also affect those entities' perceived credit risk, whichcould have further ramifications for the economy at large.

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