Europe’s Repo Market, Vital to Financial System, Is Shrinking

  • Market contracted to $6.1 trillion as of June: ICMA survey
  • Repo activity has been stymied by post-crisis regulation

Europe’s market for borrowing and lending securities, a sector that’s vital to the plumbing of the global financial system, is shrinking, figures from the International Capital Market Association confirm.

The market for repurchase agreements fell to 5.4 trillion euros ($6.1 trillion) as of June 8, down 4.1 percent from December, according to ICMA’s survey of 63 financial companies, mainly banks. While the result was largely down to a drop in the number of industry participants, an analysis using a constant sample of respondents still showed a 1.6 percent year-on-year decline, confirming that “the overall trend for repo market activity continues to be downward,” ICMA said.

The contraction of the repo market in recent years follows an increase in regulation aimed at shrinking major banks’ balance sheets. Lenders rely on repos for their day-to-day funding needs, and have warned that if the market doesn’t function efficiently, then liquidity in secondary markets may dry up. A breakdown in repos played a key role in the financial crisis in 2008.

“Repo markets have been subjected to regulatory and prudential measures that, taken all together, may jeopardize the real economic benefit of this product,” Godfried De Vidts, the London-based chairman of ICMA’s European Repo and Collateral Council, said in a statement. “The impact of this regulation is not always clear.”

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