Repurchase Agreements and the European Sovereign Debt Crises: The Role of European Clearinghouses
Résumé
This chapter investigates the European repo market and its role as an amplifier of tensions in the sovereign debt markets. We focus on the centrally cleared segment, representing the majority of European repos. A novel data set on repo and margin haircuts applied to sovereign bonds by central clearing counterparties (CCPs) is gathered, allowing us to assess the haircut methodologies used by the major European CCPs. We document that following increases in sovereign risk, haircuts set by major CCPs on peripheral sovereign bonds increased significantly. The procyclicality of haircuts and the concentration of bilateral repos raise concerns about the CCP-intermediated repo market as a source of systemic risk in the euro area. This is however mitigated by the countercyclical monetary policy of the European Central Bank (ECB).