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Repurchase agreements and systemic risk in the European sovereign debt crises: the role of European clearing houses

Author

Listed:
  • Angela Armakola

    (PRISM - Pôle de recherche interdisciplinaire en sciences du management - UP1 - Université Panthéon-Sorbonne)

  • Raphaël Douady

    () (CNRS - Centre National de la Recherche Scientifique, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, SBU - Stony Brook University [SUNY] - SUNY - State University of New York)

  • Jean-Paul Laurent

    () (PRISM - Pôle de recherche interdisciplinaire en sciences du management - UP1 - Université Panthéon-Sorbonne)

  • Francesco Molteni

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, EUI - European University Institute)

Abstract

This article investigates the European repo market and its role as an amplification channel for sovereign-debt crises. We focus on transactions cleared via central clearing counterparties (CCPs), which account for the bulk of the repo market in the Eurozone. In particular, we collect novel data on repo haircuts applied on sovereign bonds and assess the methodologies used by CCPs for margining. We find that haircuts on peripheral sovereign bonds substantially increased in response to the rise in sovereign risk. Moreover, we document that the volume of the European repo market is strongly concentrated between few large financial institutions and few clearing houses. The procyclicality of haircuts and the concentration of secured transactions raise concerns about the CCP-intermediated repo market as asource of systemic risk in the Eurozone. This is however mitigated by the countercyclical monetary policy of the European Central Bank (ECB).

Suggested Citation

  • Angela Armakola & Raphaël Douady & Jean-Paul Laurent & Francesco Molteni, 2020. "Repurchase agreements and systemic risk in the European sovereign debt crises: the role of European clearing houses," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01479252, HAL.
  • Handle: RePEc:hal:cesptp:hal-01479252
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01479252
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    Citations

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    Cited by:

    1. Legroux, Vincent & Rahmouni-Rousseau, Imène & Szczerbowicz, Urszula & Valla, Natacha, 2017. "Stabilising virtues of central banks: (re)matching bank liquidity," EIB Working Papers 2017/01, European Investment Bank (EIB).
    2. Jean-Marc Bottazzi & Mario R. Pascoa & Guillermo Ramirez, 2017. "Do security prices rise or fall when margins are raised?," FEUNL Working Paper Series wp616, Universidade Nova de Lisboa, Faculdade de Economia.
    3. Jean-Marc Bottazzi & Mário Páscoa & Guillermo Ramírez, 2017. "Do Security Prices Rise or Fall When Margins Are Raised?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01648215, HAL.
    4. Jean-Marc Bottazzi & Mário Páscoa & Guillermo Ramírez, 2017. "Do Security Prices Rise or Fall When Margins Are Raised?," Working Papers hal-01648215, HAL.

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