"Briefly - The repo market is a facility set up by the USA Fed. to enable the major Banks to balance their books overnight and cover late payments into the bank This stops the banks from becoming legally insolvent IE bankrupt !!'
The repo market is an important source of funds for large financial institutions in the non-depository banking sector, which has grown to rival the traditional depository banking sector in size.
Traditionally, the principal users of repo on the sellers’ side of the market have been securities market intermediaries (market-makers and other securities dealers in firms called ‘broker-dealers’ or ‘investment banks’) and leveraged and other bond investors seeking funding. On the buyers’ side, the principal traditional users have been cash investors seeking secure short-term investments, many of whom are highly risk-averse. These include large commercial banks, central banks investing foreign currency reserves, international financial institutions, money market mutual funds, agents investing cash collateral received by their securities lending clients, asset managers with temporary cash surpluses and the treasuries of large non-financial corporates and of financial market infrastructures such as central counterparties (CCPs) and central security depositories (CSDs). Most central banks rely on the repo market as the main channel for the transmission of monetary policy."
That is, the FED uses the repo market either to provide liquidity or to take away excess liquidity.
Banks can also access funds from the FED through the Discount Window.
"When the normal functioning of financial markets is disrupted, financial institutions may be hard-pressed to get the funds they need to finance day-to-day operations. Private credit markets may seize up, making loans available only at elevated interest rates. The Fed can step in on an emergency basis as lender of last resort, providing liquidity to the banking system. For example, it can buy government securities on the open market, thereby injecting money into the banking system. Reserve Banks also can lend directly to depository institutions, transactions known as “discount window” loans.
