Europe's repo market expands while US contracts

Euro signThe European repurchase contract, or repo, market has grown an estimated 8.6% since December, while capital requirements cause the US market to continue to shrink.

The rise in repo activity in Europe is likely to be driven by banks returning to the market for funding as they start to repay the assistance of more than €1 trillion provided by the European Central Bank in the Long Term Refinancing Operations (LTRO).

Repo agreements provide loans against assets such as government bonds, and are usually used to provide short-term capital.

The European market is estimated to be worth more than €6 trillion, according to the survey by the International Capital Market Association (ICMA).

“Today’s survey shows a healthy market that provides cash/collateral liquidity between interbank market participants in a secured way as mandated by Basel,” says Godfried De Vidts, chairman of ICMA’s European Repo Council. “This in itself provides a much safer way of distributing liquidity, in contrast to unsecured lending where counterparties are 100% exposed to each other.”

The ICMA says higher rates and greater market confidence have attracted lenders away from the European Central Bank's deposit facility, which pays no interest, and back into the market.

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