Staff Working Paper No. 910
By Anne-Caroline Hüser, Caterina Lepore and Luitgard Veraart
We examine how the repo market operates during liquidity stress by applying network analysis to novel transaction-level data of the overnight gilt repo market including the Covid-19 crisis. During this crisis, the repo network becomes more connected, with most institutions relying on existing trade relationships to transact. There are however significant changes in the repo volumes and spreads during the stress relative to normal times. We find a significant increase in volumes traded in the cleared segment of the market. This reflects a preference for dealers and banks to transact in the cleared rather than the bilateral segment. Funding decreases towards non-banks, only increasing for hedge funds. Further, spreads are higher when dealers and banks lend to rather than borrow from non-banks.
This version was updated in June 2021.
This paper was previously circulated under the title, ‘How do secured funding markets behave under stress? Evidence from the gilt repo market’.