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I refer to the following article: https://www.bloomberg.com/opinion/articles/2021-02-25/negative-interest-rates-could-be-trouble-unless-fed-acts, notably the following paragraph:

Market observers worry that this wall of liquidity could push short-term interest rates into negative territory. Although no one can be sure of the ramifications, this could prove disruptive to money-market mutual funds and to the functioning of short-term lending markets more generally. The surge in reserves will also add to banks’ assets, potentially causing them to bump up against regulatory leverage requirements, which limit the ratio of their total assets to equity capital. This, in turn, could cause some banks to pull back from lending against securities, potentially triggering yet another disruption in the “repo” market, a crucial source of financing for hedge funds, investment banks and many other institutions. Banks also might take steps to encourage households and businesses to take their deposits elsewhere.

How does negative short term interest rates disrupt the repo market in any way?

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    $\begingroup$ The article does not mention fed being worried by this, but just market observes are worried (e.g. some finance pundits) $\endgroup$
    – 1muflon1
    Mar 5 at 10:44
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Market observers worry that this wall of liquidity could push short-term interest rates into negative territory.

Fed pays interest on excess reserves (IOER) as a tool of monetary policy since late 2008.

https://www.clevelandfed.org/newsroom-and-events/publications/economic-commentary/2015-economic-commentaries/ec-201502-excess-reserves-oceans-of-cash.aspx

The "wall of liquidity" would increase excess reserves. Fed can pay interest on those reserves so the IOER rate does not have to go negative unless Fed decides to try that experiment as a tool of monetary policy.

Negative interest rates are the same as paying a net fee for keeping deposits or other investments at the bank or central bank. Extra central bank liquidity does not motivate banks or the central bank to charge fees. Banks charge fees to compensate for a loss or lack of net interest income. Central banks might try to make interest rates negative as a tool of monetary policy.

Repurchase Agreements with Negative Interest Rates:

https://www.newyorkfed.org/research/current_issues/ci10-5.html

Negative rates on repo mean the lender will pay interest to obtain the security collateral. This implies that investors would rather hold certain securities, which are under shortage, instead of other financial assets. One needs some case studies and/or theories which demonstrate or predict that a surplus of excess reserves somehow triggers a shortage of securities in repo markets. However if Fed imposes negative interest rates on reserves that is a different analysis.

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  • $\begingroup$ I'm curious to know why people downvoted this answer. It's received more than two so far. Though not necessary, it's usually helpful to post a comment along with a downvote. $\endgroup$
    – jmbejara
    Aug 30 at 15:53

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