banking and capital markets
February 13, 2013
Critics See Unintended Risk in Proposed Changes to Repo Market Rules
The Financial Stability Board has suggested tough new regulations for the repo, or repurchase, market, which lets financial institutions borrow cash by putting up securities as collateral.
By David Turner
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Proposals to reduce risk in the repo market could end up achieving the opposite, experts warn. The repo, or repurchase, market allows financial institutions to borrow cash by pledging securities as collateral. Because it offers secure borrowing, the €6 trillion ($8 trillion) European repo market helped prevent a new credit crunch in the region. “Regulation has pushed the unsecured market to the grave, so the secured market, including repo, is how lenders transact now to protect themselves from counterparty risk,” says Godfried De Vidts, the London-based chairman of the International Capital Market Association’s European Repo Council. Tougher capital requirements for unsecured loans have increased their cost to lenders.
But the Financial Stability Board, which recommends global reforms to Finance ministers and central banks, has put forward tough new repo regulations. The Basel, Switzerland–based FSB published its initial proposals in November, with final....