Repo and Reverse Repo Activity of European Banks – Market Activity, Accounting and Disclosure

104 Pages Posted: 21 Jul 2020

See all articles by Edgar Loew

Edgar Loew

Frankfurt School of Finance & Management - Accounting Department

Annika Patricia Michelle Riegel

Frankfurt School of Finance & Management

Date Written: July 13, 2020

Abstract

Repurchase agreements are money market instruments that are used widely and for various purposes due to their simplicity and flexibility. The European repo market is quite concentrated, as 80% of the transactions is conducted be-tween the top 20 banks and 61.9% of the collaterals used in the European repo market are originated in the Eurozone. Especially, for Europe the repo market is more important than ever, as it reached an all-time high of EUR 7,351 billion in June 2018. Even though the repo market is quite extensive and important, with respect to repos, there has no literature been found, which deals with the disclosure requirements of IFRS 7 in the European banking industry so far.

How disproportionate the attention paid to repos is, becomes apparent by examining the financial statement of one German bank. It was noticed, that the information provided on repos was not too extensive, even though repos ac-counted for approximately 39% of the bank’s total assets. The example of Lehman Brothers shows how important it is to formulate appropriate accounting standards that actually reflect the true nature of transactions. The extent of the financial crisis of 2007-2008 may have been reduced, if their troubled situation would have been disclosed honestly in the first place.

As the mandatory requirements of IFRS 7 should ensure, that sufficient and decision-useful information to enable users of financial statements to under-stand the risks arising from repos is disclosed, the first step is to review, if the mandatory requirements are fulfilled. 38 IFRS 7 criteria were derived from these mandatory requirements. Besides these mandatory criteria, some supplementary information was gathered. The sample which was examined within this empirical analysis consists of 66 banks from 19 European countries. It will be shown from the 5-year averages that European banks only complied on average with 54%, i.e. only slightly more than half of the mandatory disclosure requirements of IFRS 7, which apply to repos.

Keywords: Repo, Banks, Accounting, Disclosure, IFRS 7, IFRS 9, Disclosure-Index

JEL Classification: M41, M42, M48, G15, G21, G28, G32, K22

Suggested Citation

Loew, Edgar and Riegel, Annika Patricia Michelle, Repo and Reverse Repo Activity of European Banks – Market Activity, Accounting and Disclosure (July 13, 2020). European Banking Institute Working Paper Series 2020 - no. 69, Available at SSRN: https://ssrn.com/abstract=3650388 or http://dx.doi.org/10.2139/ssrn.3650388

Edgar Loew (Contact Author)

Frankfurt School of Finance & Management - Accounting Department ( email )

Sonnemannstraße 9-11
Frankfurt
Germany

Annika Patricia Michelle Riegel

Frankfurt School of Finance & Management

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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