‘No one length fits all’ – haircuts in the repo market

Miruna-Daniela Ivan, Joshua Lillis, Eduardo Maqui and Carlos Cañon Salazar

Funding markets are crucial for healthy and active financial institutions, and consequently for everyone in the economy. The repurchase agreement (repo) market plays a key role in bank and non-bank financial institutions’ (NBFIs’) daily activities by facilitating short-term financing and risk hedging. In this post, we use novel Securities Financing Transaction Regulation (SFTR) data to highlight new, and corroborate previous, stylised repo haircut facts.

Continue reading →

Central clearing and the functioning of government bond markets

Yuliya Baranova, Eleanor Holbrook, David MacDonald, William Rawstorne, Nicholas Vause and Georgia Waddington

The functioning of major government bond and related repo markets has deteriorated on several occasions in recent years as trading demand has overwhelmed dealers’ intermediation capacity. Seeking a remedy, Duffie (2020) proposes a study of the costs and benefits of a clearing mandate in these markets. Such a policy could boost dealers’ intermediation capacity by allowing more of their trades to be netted, thereby reducing their balance sheet exposures and capital requirements. In a recent staff working paper, we estimate the effects of comprehensive central clearing of cash gilt and gilt repo trades on UK dealer balance sheets during one particular stress episode. This post summarises those quantitative results and discusses qualitatively other costs and benefits of broader central clearing.

Continue reading →

What do we know about non-bank interconnectedness?

Zijun Liu and Jamie Coen.

Non-banks are clearly important in the financial system – according to the FSB, global non-bank financial intermediation grew to $75 trillion in 2013, roughly half of banking system assets. But how are they connected to banks, and what risks does this pose? Using a new granular dataset on the exposures of banks to non-banks, we gained some important insights into what these interconnections look like in the UK. Banks’ direct credit exposures to non-banks are currently small, but there is evidence that some non-bank financial institutions have entered the core of the repo network. We found little evidence in our dataset that hedge funds are conducting risky credit intermediation, but other non-bank financial institutions seem to be leveraging up via the repo market.

Continue reading “What do we know about non-bank interconnectedness?” →