| LONDON, Sept 3
LONDON, Sept 3 The European repo market grew
modestly in the first half of this year after a sharp fall in
the last six months of last year, as banks repaid cheap European
Central Bank loans and relied more on wholesale funding markets.
Repos are short-term loans in return for collateral, such as
government or corporate bonds, and are a key element of
day-to-day financing in the economy.
A survey by the European Repo Council of the International
Capital Market Association however showed that year-on-year,
activity in the repurchase market, a major source of secured
short-term funding for the region, shrank slightly.
The snapshot of the value of outstanding repo contracts
showed the market grew to 5.782 trillion euros ($7.6 trillion)
at close of business on June 11 compared with 5.499 trillion six
The recovery contrasts with reports of cuts in repo activity
by U.S. banks but reflected differences between U.S. and
European markets, where the latter are not subject to quite the
same degree of regulatory pressure to reduce reliance on
short-term wholesale funding, the ICMA said.
"The growth in European repo may also be a sign of
continuing normalisation of financial markets. Reduced reliance
on the ECB, reflected in lower liquidity surpluses and
repayments of the three-year LTROs (long term loans) is forcing
banks back into market," it said in a statement.
A full recovery back to the pre-financial crisis peak of
6.775 trillion reached in the June 2007 survey remains some way
off though. The survey's authors say current and prospective
regulatory concerns are weighing on the market.
As part of attempts to curb excessive risk-taking and avert
a repeat of the 2007/2008 financial crisis, regulators are
pursuing plans to set minimum discounts, known as "haircuts", on
the value of collateral to back repos to ensure a big enough
cushion if market valuations plunge.
Market participants say this could disrupt markets at a time
when funding is needed to spur economic growth.
The survey highlighted the continuing dominance in the share
of Italian and Spanish collateral at the expense of top-rated
German and French collateral, thanks to growing investor
confidence on ebbing fears over the euro zone debt crisis.
(1 US dollar = 0.7608 euro)