Institutional Choice between Funding Markets: Repo vs. Securities Lending

Project Start:01/2019
Researchers:Loriana Pelizzon, Zorka Simon
Category: Systemic Risk Lab
Funded by:LOEWE

Following the financial crisis, the increasingly prudent regulation and the unconventional monetary policy actions of central banks have given rise to a shortage of high quality, liquid, and collateral eligible assets. At the same time, institutions have gradually moved from the unsecured interbank lending market to the securities lending and repo markets to cover their funding needs. These two markets, repo and securities lending, seem to fulfill a similar role in providing funding liquidity and collateral, or supporting trading activities, by temporarily shifting ownership of assets in mostly overnight transactions. Despite the subtle contractual differences between repo and securities lending transactions, and whether the individual deals are demand or supply driven, there seems to be a lack of understanding regarding the incentives certain institutions, e.g., banks or insurers, might have in choosing one type of transaction over the other.

In this project, our aim is to fill this gap, by studying contractual specificities (term, fees, collateral, rebate) and the regulation of securities lending and repo markets. We want to understand if there are regulatory incentives driving the choice between funding markets, and if so, how this affects the pricing dynamics and transaction volume in these markets. We want to approach our research question both from a theoretical and empirical perspective to assess the systemic importance of these funding markets.