The total value of the repo contracts outstanding on the books of the 62 institutions who participated in the latest survey was EUR 5,647 billion, compared with EUR 6,204 billion in December 2011. Using constant samples, it is estimated that the market con- tracted over the last six months by 9.9% and by 14.2% year-on-year.
Early in August, the European Repo Council of the International Capital Market Association released the results of its
23rd bi-annual survey of the European repo market. The survey results reflect that risk aversion is still a vital important factor to banks in the selection of collateral, but the survey shows that this is no longer automatically reflected in increased use of government bonds.
The authors stress that this study is a snapshot of the European repo market on a particular day, not a measure of flows of repo activity over a period of time. As such, it does not reflect the peaks and troughs occurring between measurement dates, and the methodology has some limitations. Further, the methodology used in the survey does not include repo transactions with central banks.
It is important to remember that the survey measures the value of outstanding transactions at close of business on the survey date. Measuring the stock of transactions at one date, rather than the flow between two dates, permits deeper analysis but is difficult to reconcile with the flow numbers published by other sources. As the survey is a ‘snapshot’ of the market, it can miss peaks and troughs in business between survey dates, especially of very short-term transactions. In addition, the values measured by the survey are gross figures, which mean that they have not been adjusted for the double counting of the same transactions between pairs of survey participants. Nor does the survey measure the value of repos transacted with central banks, as part of official monetary policy operations. Central bank intervention has of course been very substantial during the recent market difficulties, not least, through the Long-Term Refinancing Operations (LTRO) of the European Central Bank.
The contraction in the European repo market according to the survey may be attributed to a reduced risk appetite among banks based on concerns about counterparties as a result of the financial troubles in the Eurozone. Flattening yield curves have also played a role.
The sharp contraction in the survey total to EUR 5,647 billion from EUR 6,204 billion in December 2011 (-9.9% when adjusted for survey sample changes) reflects a number of factors: the difficult financial and economic situation in Europe in general and the Eurozone in particular; reduced risk appetite among banks due to persistent concern over the credit risk of counterparties and the constraints of weak balance sheets; and the impact of the two massive LTRO by the ECB in December 2011 and February 2012 (both after the last survey). These refinancings have helped to calm the markets but, at the same time, have reduced the need of many banks to use the markets to manage their liquidity. And, together with other exceptional monetary policy measures, the LTRO have flattened the yield curve and suppressed trading opportunities for the foreseeable future.
This risk aversion was not necessarily reflected in a flight to government bonds, however.
Greater risk aversion was also apparent in shifts in the mix of collateral. Although the share of government bonds in the pool of EU collateral fell back slightly (to 78.7%), this is no longer a straightforward indicator of risk aversion. The share of the most desirable Eurozone government bond, bunds, contracted due to continued hoarding as a safe- haven asset, while the shares of Italian and Spanish government bonds contracted for exactly the opposite reason. The declines in the shares of Italian and Spanish collateral were especially marked in tri-party repo, which has proved a very sensitive indicator of risk appetite since 2007. These declines were compensated by greater use of German and French bonds, and of securities issued by official international financial institutions, but especially of pfandbrief, the share of which jumped from 11.4% to 17.4% of tri-party collateral.