by Felix Hermes, Maik Schmeling, Andreas Schrimpf
We analyze the international dimension of repo markets using novel euro area regulatory microdata. Our findings highlight the deep integration of funding markets across the Atlantic and the US dollar’s outsized role. Our paper documents five key facts:
(1) US dollar repos by euro area entities account for approximately 40% of total volumes and are comparable in size to euro repos;
(2) term repos (with maturities beyond one day) are quantitatively more relevant than commonly thought, especially non-centrally cleared ones;
(3) repo markets have become more collateral-driven, involving diverse nonbank financial players and trading motives;
(4) banks’ intragroup transactions form a large share of non-centrally cleared volumes; and
(5) haircuts, even for riskier collateral, are often zero or negative, especially in euro trades.
We show in two empirical applications that US monetary policy shocks spill over to euro repo rates and that negative haircuts arise from market power and collateral demand dynamics.
The full paper is available here.