ECB working paper: From cash- to securities-driven euro area repo markets: the role of financial stress and safe asset scarcity

Claus Brand, Lorenzo Ferrante, Antoine Hubert
No 2232 / January 2019

Focussing on repo specialness premia, using ISIN-specific transaction-by-transaction data of one-day maturity repos, we document a gradual shift from cash- to securities-driven transactions in euro area repo markets over the period 2010-2018. Compared to earlier studies focussing only on specific sub-periods or market segments we extend, illustrate, and validate evidence on finan- cial frictions that are relevant in driving repo premia: controlling for a comprehensive range of bond-market specific characteristics, we show that repo premia have been systematically affected by fragmentation in the sovereign space, bank funding stress, and safe asset scarcity. These chan- nels exhibit very strong country-specific differences, as also reflected by large discrepancies in country-specific interest rates on General Collateral. To ensure robustness of our empirical find- ings, we apply panel econometric and data mining approaches in a complementary and mutually informative way.

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