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I keep hearing about repo rate etc. But this question is not what is the repo rate. It is: What is a definition of 'repo' ?

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Repo is the short abbreviation for Repurchase agreement, as per Investopedia (https://www.investopedia.com/terms/r/repurchaseagreement.asp).

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Thanks for the link Mike J. My understanding is now that:


A 'repo', short for 'repurchase agreement', is typically: Party 'A' (effectively a borrower - typically a bank) selling an asset (eg. a treasury bond) for cash to Party 'B' (effectively the lender) with the following conditions as part of the deal: Party A agrees to buy the asset back the next day for cash at an agreed slightly higher price and Party B agrees to sell the asset back to Party A the next day for cash at the agreed slightly higher price.


Party A benefits by obtaining cash for a day and Party B benefits by getting a percentage return on the cash provided.


The annualised percentage price increase to the slightly higher price is known as 'The Repo Rate.' Increased repo rates indicates that repo lenders see more risk of default in Repo borrowers.


As repo borrowers are usually banks then a higher repo rate indicates a degree of banking system instability, either systemic or technical.

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  • $\begingroup$ No, a higher repo rate doesn’t necessarily say anything about instability. In fact, during the 2008 financial crisis, repo rates dropped, because (1) repos are collateralized loans, so ones backed by high-quality collateral are preferable to uncollateralized loans (including large-dollar uninsured deposits), and (2) there’s a censoring effect, where lower-quality borrowers just wouldn’t get loans at all while higher-quality ones who generally borrowed cheaper to begin with continued to get them. $\endgroup$ – dismalscience Nov 7 '19 at 0:10
  • $\begingroup$ A higher median repo rate basically just means that the risk-free cost of cash increased. Sometimes that happens in an orderly way, as when the Fed moves to increase the Fed Funds rate and thus all short rates, sometimes it happens by surprise due to cash shortfalls (there are a bunch of factors that affect the supply and demand for cash in this market) and you see a big spike in rates (the latter has been happening more often over the past year, as unencumbered reserves at banks have become more scarce). $\endgroup$ – dismalscience Nov 7 '19 at 0:15
  • $\begingroup$ So, to be clear, an increase in average repo rates says literally nothing about default risk. $\endgroup$ – dismalscience Nov 7 '19 at 0:17

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