Repurchase Agreements and the European Sovereign Debt Crises: The Role of European Clearinghouses

Abstract

This article investigates the European repo market and its role as an amplification channel for sovereign-debt crises. 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 counter parties (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 bymajor 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 Eurozone. This is however mitigated by the counter cyclical monetary policy of the European Central Bank (ECB).