Purchase and Resale Agreements (PRAs)

Demystifying Purchase and Resale Agreements (PRAs): A Comprehensive Guide

Understanding the intricacies of Purchase and Resale Agreements (PRAs) is essential for grasping their role in central bank operations and monetary policy implementation. Let's delve into the details of PRAs, their historical significance, and their impact on financial markets.

Deciphering Purchase and Resale Agreements (PRAs)

Purchase and Resale Agreements (PRAs) are instrumental tools used by central banks, such as the Bank of Canada (BoC), to manage liquidity and influence interest rates in the money market. These agreements involve the temporary sale of securities with an agreement to repurchase them at a later date, serving as collateral for cash loans.

Exploring the Dynamics of PRAs

While Special Purchase and Resale Agreements (SPRAs) are overnight transactions, term PRAs extend over longer periods, although they are not currently in use. Typically utilized during market stress episodes, PRAs provide temporary liquidity injections into the money market, aiming to alleviate funding pressures and stabilize interest rates.

Unraveling the History of PRAs

The history of PRAs traces back to their adoption by the Bank of Canada in response to the 2007 financial crisis. Initially employed in December 2007 amidst global funding concerns, PRAs witnessed recurrent usage during subsequent market disruptions, notably during the collapse of Bear Sterns and the near-bankruptcy of AIG in 2008. These interventions aimed to mitigate market turmoil and restore stability to the financial system.