The market for a key funding instrument for banks in Europe has shrunk, highlighting how reliant financial institutions in the region have become on European Central Bank support.
The market for European repurchase – repo – transactions contracted by an estimated 14.2 per cent year-on-year in the six months to June 30, based on constant samples over the period.
The total value of outstanding repo contracts – in which banks pledge their securities as collateral for short-term loans from money market funds or other investors – stood at €5.6bn in June, according to the latest twice yearly snapshot of the market by the European Repo Council of the International Capital Market Association.
Richard Comotto, senior visiting fellow at the ICMA centre at Reading University, said that while repo markets were vulnerable to swings, the most recent contraction highlighted how dependent banks in the region had become on ECB funding.
Eurozone banks borrowed more than a €1tn from the ECB in December and February via its three-year longer-term refinancing operations. The LTRO has reduced the reliance by some banks on funding from the repo market.
Mr Comotto said the worry was that if banks continued to sideline the repo market in the long-run it would lead to a capacity problem as the market “shrivels”, ultimately making it more difficult to wean lenders off ECB funding.
The share of interbank triparty repo market – in which a custodian bank helps to admin-
ister a repo agreement between two parties – also dropped slightly.
However, Mr Comotto said there was anecdotal evidence to suggest that an increasing number of insurers, pension funds and companies were using the repo market as an alternative to bank deposits.
While the overall size of the repo market is still above the record low that followed the collapse of Lehman Brothers in 2008, the figures show how the eurozone financial crisis is altering the way banks behave.
Banks in countries such as Spain and Italy have become more reliant on central bank funding after effectively being locked out of capital markets as funding costs have soared during the crisis.
FINANCIAL TIMES
The market for European repurchase – repo – transactions contracted by an estimated 14.2 per cent year-on-year in the six months to June 30, based on constant samples over the period.
The total value of outstanding repo contracts – in which banks pledge their securities as collateral for short-term loans from money market funds or other investors – stood at €5.6bn in June, according to the latest twice yearly snapshot of the market by the European Repo Council of the International Capital Market Association.
Richard Comotto, senior visiting fellow at the ICMA centre at Reading University, said that while repo markets were vulnerable to swings, the most recent contraction highlighted how dependent banks in the region had become on ECB funding.
Eurozone banks borrowed more than a €1tn from the ECB in December and February via its three-year longer-term refinancing operations. The LTRO has reduced the reliance by some banks on funding from the repo market.
Mr Comotto said the worry was that if banks continued to sideline the repo market in the long-run it would lead to a capacity problem as the market “shrivels”, ultimately making it more difficult to wean lenders off ECB funding.
The share of interbank triparty repo market – in which a custodian bank helps to admin-
ister a repo agreement between two parties – also dropped slightly.
However, Mr Comotto said there was anecdotal evidence to suggest that an increasing number of insurers, pension funds and companies were using the repo market as an alternative to bank deposits.
While the overall size of the repo market is still above the record low that followed the collapse of Lehman Brothers in 2008, the figures show how the eurozone financial crisis is altering the way banks behave.
Banks in countries such as Spain and Italy have become more reliant on central bank funding after effectively being locked out of capital markets as funding costs have soared during the crisis.
FINANCIAL TIMES
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