Global repo markets in transition post-crisis, regulatory changes and central bank stimulus: CGFS report
12 April 2017
A new report by the Committee on the Global Financial System analyses the changes in the availability and cost of repo financing, a key market for short-term funding, and how these changes affect the ability of repurchasing agreements to support the financial system.
Repo market functioning finds substantial differences in the way repo markets, which allow borrowers to pawn securities for short-term loans, work across countries. Markets are in a state of transition as borrowers and intermediaries adapt to the post-crisis economic and regulatory environment.
"The key takeaway from this work is that repo markets are not settled yet," said CGFS chair William Dudley, President of the Federal Reserve Bank of New York. "The effects of unconventional monetary policy and regulatory reforms work in opposite directions in many cases, and they are not the same in all markets. We need to keep an eye on this market because it is critical for the smooth functioning of the system."
With nearly $9 trillion worth of outstanding repo and reverse repo agreements secured with government bonds, repo markets provide a number of key economic functions. Central bankers plan to conduct a follow-up study within two years.
"Repo markets play a key role in facilitating the flow of cash and securities around the financial system", said Bank of England Deputy Governor Sir Jon Cunliffe, who chaired the study group. "These markets are clearly adjusting to new regulatory standards, accommodative monetary policy and to new market adaptations and developments. Some jurisdictions have seen a change in repo market intermediation and the way the market provides repo services to end users. Given the important economic functions that repo performs we need to monitor closely how this develops."
The report, which drew on a survey of repo market participants and feedback from the industry, identifies several drivers behind these changes, including:
- exceptionally accommodative monetary policy, which has provided ample central bank liquidity to the market and reduced the need for banks to trade reserves through the repo market; and
- changes in regulation that have made intermediation more costly in terms of regulatory capital.