How Does the Repo Market Behave Under Stress? Evidence From the COVID-19 Crisis

By Anne-Caroline Hüser, Caterina Lepore, Luitgard Veraart

November 5, 2021

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Format: Chicago

Anne-Caroline Hüser, Caterina Lepore, and Luitgard Veraart. How Does the Repo Market Behave Under Stress? Evidence From the COVID-19 Crisis, (USA: International Monetary Fund, 2021) accessed September 19, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We examine how the repo market operates during liquidity stress by applying network analysis to novel transaction-level data of the overnight gilt repo market including the COVID-19 crisis. During this crisis, the repo network becomes more connected, with most institutions relying on existing trade relationships to transact. There are however significant changes in the repo volumes and spreads during the stress relative to normal times. We find a significant increase in volumes traded in the cleared segment of the market. This reflects a preference for dealers and banks to transact in the cleared rather than the bilateral segment. Funding decreases towards non-banks, only increasing for hedge funds. Further, spreads are higher when dealers and banks lend to rather than borrow from non-banks. Our results can inform the policy debate around the behaviour of banks and non-banks in recent liquidity stress and on widening participation in CCPs by nonbanks.

Subject: Asset and liability management, Central counterparty clearing house, COVID-19, Currencies, Financial institutions, Financial markets, Health, Hedge funds, Liquidity, Money

Keywords: Central counterparty clearing house, COVID-19, Currencies, Gilt dealer, Hedge funds, Liquidity, Policy debate, Repo market, Repo network, Repo transaction

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/267
Stock No:

WPIEA2021267
ISBN:

9781589068452
ISSN:

1018-5941

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