The vital U.S. repurchase market is 40 percent below its peak in early 2008 and has shown very little sign of rebuilding, the Financial Times reported April 14.
The Times estimates the repo market at about $2.5 trillion, down from nearly $4.3 trillion in early 2008, but that’s based on volumes reported by the 20 primary dealers authorized to repo with the Federal Reserve. RepoWatch believes those dealers represent about half the market. (Update: In June 2012 New York Fed analysts said primary dealers represented about 90 percent of the U.S. repo market)
The reasons for the cutback include investment banks that have reduced their short-term leverage, reluctance of repo lenders to accept anything but top-notch collateral, and low interest rates on repo loans, writes reporter Michael Mackenzie.
From the Bloomberg story:
The current lack of appetite for extending money to lower-quality collateral via repo helps explain why the use of securitization among banks has not come roaring back.
“The decline in activity reflects a number of factors, including the shrinkage in dealer leverage and the pullback in securitization,” says Joe Abate, money-market strategist at Barclays Capital
“The revival of the repo market depends on when dealers start expanding their balance sheets and we see an upturn in securitization, which is financed through repo,” says Mr Abate.