What is a repo loan?
In: Economics
So Consider the central bank of your nation versus the normal banks in your nation.
When The Central bank feels that there are funds needed in the economy, then it disburses funds to the banks so that money supply increases and purchases their securities in exchange of giving the funds (hence technically it’s a loan given by the Central bank) the rate at which this loan is given is called the Repo Rate [meaning the banks agreeing to REPURCHASE (hence the word repo) these securities from the central bank].
Reverse Repo is exactly the opposite of repo and practiced when Central bank feels that there is excess money in the economy.
Generally these loans are for very short period of time (as low as one day!)
The term “loan” is a bit of a misnomer. I give you money, you give me something of value and agree to buy it back at a later date with a higher price.
Repo loans are an important part of the plumbing of the financial system because they are a loan that can be given out at “arm’s length”, that is without knowing all that much about who you’re giving money to and how sound of a borrower they are – If they go bankrupt, you get to keep the thing they gave you and have minimal losses. So while a bank would do some serious work to understand your creditworthiness before giving you a business loan or a mortgage, it just gives you a repo loan and does not care all that much about who you are and what you do with the money.
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