Since the eurozone crisis, there has been a stark divergence between European banks and Japanese banks in their dollar uses and sources. A BIS working paper shows that these shifts have implications for the price of dollar funding. Researchers document a “Japan Repo Premium.” Japanese banks pay a premium for repos with US money market funds (MMFs), despite identical contract and risk characteristics. Using the US MMF reform as a natural experiment, they establish that Japanese banks’ long maturity dollar assets generate a relatively inelastic demand for long maturity dollar borrowing. Differences in the demand for dollar funding combined with market and supply side frictions can explain these pricing differences. MMFs mainly provide short term repos and favor longer term clients for long maturity repos. Japanese banks concentrate their repo borrowing, reducing their bargaining power in order to extend their funding maturity. The results have implications for the formation of global dollar funding networks. Research provides evidence for European banks intermediating repos to Japanese banks, with economically significant estimated spreads from maturity transformation.
