Market Power in Wholesale Funding: A Structural Perspective from the Triparty Repo Market
71 Pages Posted: 19 May 2022 Last revised: 25 Sep 2022
Date Written: September 23, 2022
I model and structurally estimate the equilibrium rates and volume on the Triparty repo market to study imperfect competition in wholesale funding. Even in this systemically important market, where seemingly homogeneous repos trade, I document persistent rate differences paid by dealers. I characterize the Triparty market as cash-lenders allocating their portfolios among differentiated dealers who set repo rates. I find that cash-lenders' aversion to portfolio concentration and preference for stable lending grant dealers substantial market power: between 2011 and 2017, dealers borrowed at rates that were 21 bps lower than their marginal value of intermediating borrowed funds. Dealers' market power makes the observed wholesale repo rate understate the financing rate available to market participants who rely on repo funding, and offers a novel explanation for funding spreads such as the Treasury cash-futures basis and the Treasury swap spread.
Keywords: Triparty repo, market power, portfolio allocation, funding spreads, intermediary asset pricing
JEL Classification: G11, G12, G21, G23, L13
Suggested Citation: Suggested Citation