Higher rates, ECB loan repayments spur euro repo activity

Wed Sep 18, 2013 5:27am EDT

* Higher money market rates spur banks to lend

* Repo activity edging towards 2010 record highs

By Emelia Sithole-Matarise

LONDON, Sept 18 (Reuters) - The European repo market grew almost 9 percent in the first half of this year as banks weaned themselves off cheap European Central Bank cash and higher money market rates spurred inter-bank lending.

The repo market is a key source of funding for banks. A borrower offers collateral, usually government bonds, as security against a cash loan.

Euro-denominated business grew while sterling and U.S. dollar repo activity declined, reflecting the tentative return of banks in the currency bloc to the money market as they repaid emergency loans from the ECB.

A snapshot of the total value of outstanding repo contracts showed the size of the market at 6.076 trillion euros at close of business on June 12, 2013. Six months earlier, the market totalled 5.611 trillion euros.

After reaching a record high of 6.979 trillion in June 2010, repo activity had shrunk as the euro zone debt crisis fractured trust between the region's banks. The ECB's 1 trillion euros of cheap long-term loans, extended in late 2011 and early 2012, also reduced the need for banks to tap the market.

The survey, conducted by the European Repo Council of the International Capital Market Association (ICMA) using data from 61 financial groups, also highlighted a bounce in the value of electronic trading to a record high of 1.059 trillion euros. The revival followed a slump to 960 billion euros in December from the previous record of 1.01 billion hit in June 2012.

"The revival in repo activity in Europe appears to be driven by banks in the euro zone returning to the market for funding as they start to repay the exceptional assistance of over 1 trillion euros provided to the market via the European Central Bank," ICMA said in a press release.

"Higher repo rates have had a reinforcing effect by attracting lenders into the market."

Banks have so far repaid 450 billion euros of the ECB's extraordinary three-year loans, squeezing excess liquidity in the financial system to 243 billion euros from over 800 billion euros in early 2012.

Along with the U.S. Federal Reserve's plans to start trimming its monetary stimulus, that has contributed to higher money market rates, luring banks away from the ECB deposit facility - which pays a zero percent rate - and into the market.

An easing of concerns over the euro zone debt crisis - reinforced by the ECB's pledge to whatever it takes to save the euro - has also aided confidence.

The use of short-dated repos of one month or less maturity, jumped to 57.2 percent from 50.5 percent, showing that banks are still cautious about lending beyond one month.

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