A repo is really just a fancy interbank loan that can be extended by entities that aren't part of the ordinary interbank market. The reason that a bank might want to borrow in the money markets rather than the discount window is that the widows and orphans in the money market don't have access to the central bank support rate, so they might charge a lower interest rate.

I can't quite see how this can come back to bite anybody on the ass who is remotely important for the continued functioning of the financial system. The solution to a speculative bubble in a non-critical part of the financial system is to let the suckers go tits-up, and apply Ye Olde-Fashioned Keynesian Stimulus to the real economy. But if you don't like money market players repoing with the banking system, just allow money market players to make deposits in a central bank reserve account like regular banks, and pay the overnight target rate as a support rate for central bank reserves. That should kill the repo business stone dead.

- Jake

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