How Does the Repo Market Behave Under Stress? Evidence From the COVID-19 Crisis
Electronic Access:
Free Download. Use the free Adobe Acrobat Reader to view this PDF file
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.
Series:
Working Paper No. 2021/267
Subject:
Asset and liability management Central counterparty clearing house COVID-19 Currencies Financial institutions Financial markets Health Hedge funds Liquidity Money
Frequency:
regular
English
Publication Date:
November 5, 2021
ISBN/ISSN:
9781589068452/1018-5941
Stock No:
WPIEA2021267
Pages:
31
Please address any questions about this title to publications@imf.org