Implications of the Funding Crunch

来历: CHINA FOREX 2019 Issue 4 作者:Gao Zhanjun
In June 2013,there was a rare “money shortage” in China’s financial market: the repo rate reached a record high of 30%,bond issues failed and yields rose sharply. Massive fund rede

In June 2013there was a rare “money shortage” in China’s financial market: the repo rate reached a record high of 30%bond issues failed and yields rose sharply. Massive fund redemptions followedstraining the market infrastructure. Some institutions defaulted and the stock market plummeted.

Money shortages – dangerous and sometimes surprising in their severity –  are not necessarily a thing of the past. Some – though not all – of the contributing factors are still with us today. The fact that various factors were intertwined and appeared together at a sensitive time made this cash crunch one of the most complex events in China's financial history.

More recentlythe US had its own taste of a money shortage. On September 162019 the effective federal funds rateor EFFRsuddenly surged. (The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.) The weighted average rate rose from the previous session’s 2.15% to 2.25%. That reached the upper limit of the federal funds target rate (FFTR) range of 2-2.25% and exceeded 3% at its peak. The next daythe EFFR continued to risewith the weighted average rate reaching 2.3%again breaking the upper end of the FFTR range and briefly exceeding 4%. (See Chart 1) The repo ratemeanwhileshot up to a dangerous 10%a highly unusual level. This was an American funding crunch.

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