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Economists make rare estimate of repo volumes

Basel economists have found repo markets were much more tumultuous in the U.S. than in Europe during the financial crisis of 2007 and 2008, according to a December 2008 study.

This study is important because it makes a rare effort to quantify the size of the repo markets in the U.S. and Europe.

In the U.S. it says 19 primary dealers and about 1,000 bank holding companies reported peak repo borrowings of roughly $6 trillion in the first quarter of 2008. This misses a good bit of the U.S. market, since repo is also conducted by many non-bank firms, but no one collects data on the total market, and also because banks can net their repo volumes when the lending and borrowing was conducted with the same financial institution.

In Europe, where more reliable data is compiled annually by the European Repo Council, the study estimates that repo borrowing volume peaked at just over $3 trillion in the first half of 2006.

The authors report the gross amount outstanding at the end of 2007 as roughly $10 trillion in each of the U.S. and Euro repo markets and another $1 trillion in the UK repo market, but this double counts borrowing and lending, so actual volume was roughly $10.5 trillion.

The study attributes repo volatility in the U.S. during the crisis partly to investment banks’ heavy reliance on repo funding, facilitated by the convenience and seeming security of the tri-party market. Further, early in the crisis European central banks accepted a broader range of collateral from a wider variety of borrowers, which may have eased pressures.

In tri-party repo, JP Morgan Chase and Bank of New York Mellon act as clearing banks for repo transactions, providing such services as settling the transaction and valuing and managing collateral.

The study is by Peter Hordahl and Michael R. King, published by the BIS Quarterly Review, which is a publication of the Bank for International Settlements. The Bank, based in Basel, Switzerland, coordinates international banking, monetary and financial oversight and serves as a bank for central banks.

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