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During the last few days, eurepo rates have been increasing, especially in very short-term maturities:

* source

In my view this increase can be attributed to:

  • Lower excess liquidity in periphery banks (especially Spanish/Italian ones) which pushes them to higher use of MRO lending (as is evident in recent ECB weekly statements). Since the MRO rate is paid on the operation maturity (MROs are weekly operations), the banks cost of funds is higher (compared to the LTROs) which pushes their offered repo rates to higher levels.
  • Capital flight from the Eurozone as a whole which mostly moves to Swiss banks. The latter could probably have tighter lending standards and require higher compensation for their borrowing in the euro repo market. Furthermore, any euros acquired by the SNB (as part of its swiss franc floor policy) will probably be parked at the ECB (or maybe invested in German debt) and not lent in the interbank market.
  • General risk avoidance (especially given the ongoing rating downgrades of European banks) with a shortening of repo maturities and higher repo rates (to compensate for higher risks).

Luckily, the EBF also provides detailed daily rates per panel bank which seem to confirm the above hypothesis:

The increased rates from ING are a bit worrying. It’s also quite evident (especially if one looks at the total panel bank data) that there’s a visible increase in both the ‘risk-free lending rate’ (which is probable around 0.15%) as well in the troubled bank premium (which offer rates close to 0.20%).

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Kostas Kalevras

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