Yves Mersch: Ructions in the repo market – monetary easing or regulatory squeezing?

26 January 2017

ECB's Mersch reviews the trends that have affected both the supply and demand for good collateral which confluence reflects the situation in the repo market nowadays.

Banks and other market participants report a decrease in market making activities and collateral scarcity in repo-markets. The perception of a challenging environment can therefore not be denied.

Pro-cyclical market reactions during and after the financial crisis and – related – changes in banking regulation clearly had an impact on the functioning of the repo markets. But with the continued economic recovery market stress should fade and conditions for unsecured lending might re-gain some attractiveness. Likewise, market players will adjust their business models over time amid a new regulatory environment.

Regarding the ECB’s asset purchase program, two important points have to be made:

• Although the APP might have some negative side effects on the functioning of the repo market as compared to the pre-crisis levels, other more potent factors were at work. To reduce spill-over effects the ECB has also introduced several mitigation measures.
• Even more important: the ECB has one mandate, which is to ensure price stability. Elevated risks to its goal have made unconventional measures necessary on an unpreceded scale and on a temporary basis. And they prove successful. Although we try to minimise negative side effects, any of these considerations are without prejudice to the obligation to honour our mandate.

Full speech

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