The Euro Interbank Repo Market

Abstract

The search for a market design that ensures stable bank funding is at the top of regulators' policy agenda. This paper empirically shows that the central counterparty (CCP)-based euro interbank repo market features this stability. Using a unique and comprehensive data set, we show that the market is resilient during crisis episodes and may even act as a shock absorber, in the sense that repo lending increases with risk, while spreads, maturities, and haircuts remain stable. Our comparison across different repo markets shows that anonymous CCP-based trading, safe collateral, and the absence of an unwind mechanism are the key characteristics to ensure market resilience.

The internet appendix for this paper is available at the following URL: http://ssrn.com/abstract=2368158

Keywords: Repurchase agreements, money market structure, central counterparty, short-term debt, financial crisis, unconventional monetary policy

JEL Classification: E43, E58, G01, G12, G21, G28