Repos were hot … back in 1979

Think repos are new?

Check out this September 1979 article from the Federal Reserve Bank in St. Louis by Norman N. Bowsher. Even then, repos were popular.

From the report:

The market for repos has increased dramatically in the past few years, and it has become one of the major financial markets in the nation. Since 1969, repos of commercial banks with the nonbank public have grown at an average 26 percent annual rate, although the pace has been uneven. The sharpest gain occurred in 1973 when outstanding repos more than doubled. In the following two years, repos increased at an average annual rate of 8 percent. During 1976, there was another jump (80 percent) in repos, and since therm the average annual growth rate has been 21 percent.

The growth in repos over this period reflects several factors. The most important motivations for lending in the repo market are the prohibition of interest payments on demand deposits and the higher market interest rates since the mid-l960s. Also, both the wider use of computers and more sophisticated cash management systems have facilitated the collection and transfer of large volumes of funds, contributing to the growth of the market.

Over the past decade, banks have obtained increasing proportions of their total resources in the open market. This activity, which involves bidding for liabilities in order to expand assets, is commonly called liability management. This behavior differs from the traditional role of banks, which is to receive deposits from customers and to use these funds to lend or invest. Devices now used to obtain such funds include federal funds borrowing, negotiable CDs, commercial paper, Eurodollar borrowing, and repos. Large banks usually are borrowers of funds in the repo market. These institutions typically seek funds and have portfolios of government-issued and -guaranteed securities with which to transact.

Even in 1979, people were using repos to game accounting rules:

Another advantage of repos to certain nonbank investors is the flexibility in recording these transactions on their books. Some investors choose to record the ownership of U.S. government securities rather than the ownership of repos. This reporting feature is particularly appealing to those institutions, such as state and local governments, that are required to invest in Treasury securities.

Here’s a reason for repos to become more popular once Federal Reserve Chairman Ben Bernanke starts raising interest rates:

Repos can be used during a period of rising interest rates to supplement the yield on portfolios by allowing investors to purchase higher-yielding instrnmeuts without having to sell outright and take a capital loss on the securities in the portfolio. Those securities may be sold under a repo and the funds used to buy new securities.