The September 2019 Repo Spike
For a few days in September 2019, the overnight interest rate that banks pay to borrow cash against Treasury collateral spiked from around 2% to as high as 10% — a plumbing failure in the world's most routine funding market, caused by a shortage of bank reserves nobody had been watching closely.
Prerequisites: Repo and Reverse Repo
On September 16-17, 2019, the overnight repo rate — the rate at which banks and dealers borrow cash overnight against Treasury collateral, normally a sleepy corner of the market that trades a hair above the Fed's target rate — briefly spiked to 10%, roughly five times its usual level. Repo is supposed to be the most boring, mechanical market in finance: it is used every single day to fund inventories of bonds, and a spike of that size meant someone, somewhere, was desperate enough for cash to pay an extraordinary premium for it overnight.
Why the plumbing backed up
Two ordinary events landed on the same day. Corporations pulled cash out of money-market funds to pay a quarterly tax deadline, and the Treasury settled a large batch of new bond issuance that same week, both of which drained cash out of the banking system and into government accounts. Normally, banks holding a cushion of spare reserves at the Fed would simply lend that cash into the repo market and smooth the shock over. But bank reserves had been quietly shrinking for two years as the Fed ran off its balance sheet after the 2008-era expansion, and post-crisis regulation (liquidity coverage ratios) made the largest banks reluctant to lend down their reserve cushions even for a profitable overnight trade. When the cash need showed up, the reserves that would once have absorbed it weren't sitting where they were needed, and the rate offered to attract lenders overnight simply kept rising until it found a clearing price.
The response
The New York Fed intervened within hours, injecting cash through repo operations to bring the rate back down, and within weeks began outright purchases of Treasury bills to permanently rebuild the reserve cushion — a program officials were careful to call "reserve management," not quantitative easing, even though the mechanics looked similar. The episode also led directly to a permanent backstop: the Fed's Standing Repo Facility, which now lets eligible banks borrow cash against Treasury collateral at a fixed rate on demand, so a repeat squeeze has a pre-built release valve.
The repo spike wasn't a credit event or a solvency scare — it was a plumbing problem. Aggregate bank reserves had fallen below the level the system actually needed to absorb routine cash swings, and two unremarkable, foreseeable events (a tax date and a bond settlement) happening on the same day were enough to expose the shortfall.
It's tempting to read any sudden rate spike as a sign of counterparty stress or a bank in trouble. Here, no institution was insolvent or even particularly weak — the rate spiked purely because the total supply of reserves in the system had drifted too low relative to demand, a distinction the Fed's post-2019 reserve-management framework was built specifically to prevent from recurring.
Related concepts
Practice in interviews
Further reading
- Federal Reserve Bank of New York, Staff Reports, Why September 2019 (2020)