How does the repo market behave under stress? Evidence from the COVID-19 crisis

Anne-Caroline Hüser, Caterina Lepore and Luitgard A. M. Veraart

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We examine how the repo market operates during liquidity stress by applying network analysis to novel transaction-level data of the overnight gilt repo market including the COVID-19 crisis. We find that during this crisis the repo network becomes more connected, with most institutions relying on previously used counterparties. There are however important changes in the repo volumes and spreads during the stress relative to normal times. There is a significant increase in volumes traded with the central counterparties (CCPs) sector. At the same time non-banks, except hedge funds, decrease borrowing and face higher spreads in the bilateral segment. Overall, this evidence reflects a preference for dealers and banks to transact in the centrally cleared rather than the bilateral segment. Our results can inform the policy debate around the behaviour of banks and non-banks in recent liquidity stress and on widening participation in CCPs by non-banks.

Keywords: repo market; liquidity risk; financial networks; non-banks; Covid-19; coronavirus (search for similar items in EconPapers)
JEL-codes: G10 G33 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2024-02-01
New Economics Papers: this item is included in nep-ban, nep-net and nep-rmg
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Published in Journal of Financial Stability, 1, February, 2024, 70. ISSN: 1572-3089

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:121347

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