What is a the repo rate?

The “Repo Rate,” or as it is now referred to as of 2006, the Official Bank Rate. This is the rate at which banks may securely borrow money from their respective home governments. This is a key economic ability and helps banks stay in business in harsh financial times. Recent years banks of the world have been relying on this term of agreement to stay afloat, times have been hard on everyone individual and corporation a like. The Repo Rate for South Africa is currently at 7%; this allows banks to essentially take out a secured loan from the government at a 7% interest rate. The loan would work as such, the bank would offer up a security as collateral, this being something highly lucrative so that the government may dispose of such assets easily if the bank should default on the loan.

This is rare to happen but in tough times as they have been of late it can happen quite often. Many smaller banks will be unable to make back the difference needed to compensate for the interest pile up on the loan that would be taken out. These loans are similar in structure to average person loans but are no where similar when it comes to amount, usually in the billions, so interest can be a permanent setback that can build up quickly. Usually these types of loans because of their size are handled relatively quickly, if not almost immediately. They are used as more of a breather to cross a dry period in the market allowing the bank some time to bounce back and ease some of the bills they face. When a bank does have to default on their loan usually the company itself is seized and systematically disassembled by the government, selling off most of the now bankrupt banks pieces to other larger firms or having them out right demolished and renovated. Repo rates can make or break banks, quite literally in some cases.

A Tri-party repo is as it sounds a loan transfer that involves three parties. A secondary company, the tri-party, acts as a mediator between the bank and the government, massive amounts of money can be transferred in this fashion, trillions is funded into the United States of America via other countries and banks in this manner. In such a transaction the tri-party receives both loan and collateral and delivers loan to the necessary party. If said party defaults on the loan the tri-party member liquidates the collateral assets and is responsible for reimbursing the final party member of the transaction. This can be a complicated process but is how many bank companies have managed to stay in business and thus have allowed thousands world wide to keep money, that otherwise would have been lost. It can be a dangerous game to play but when times are tough and push comes to shove even those at the top have to make the close calls, and taking out a loan, like it is for so many at the bottom of the food chain, is the last and only resort, the Repo Rate is their rate of interest and exchange.