Eurozone government deposits at the central bank are subject to a 0% rate cap. This means hundreds of billions of euros could be shifted around. In some cases, this will reduce repo lending or boost demand for safe bonds, all exacerbating the existing collateral shortage.
Exiting negative and eventually zero interest rate policies does not simply mean higher rates, but it also means some of the incentives that have dictated the basic market structure and functioning we have become accustomed to over the years of extraordinary policies will change as well. One such change has been highlighted by reports that Germany’s and Austria’s debt agencies are planning to change their repo rules. They no longer want to lend out their securities against cash, but only against other collateral.
The full article is available at https://think.ing.com/articles/rates-gov-cash-management-worsens-collateral-shortage