The effect of asset purchases on repo rates: Evidence from Germany

Sammanfattning

In recent years, repo rates declined markedly below the European Central Bank (ECB) deposit facility rate, the rate at which banks receive interest for their excess reserves. This coincides with the ECB's Asset Purchase Programs (APPs) launch in October 2014. The thesis analyzes how institutional features of the ECB's monetary policy framework that were designed to support monetary policy and avoid market distortions actually disconnect the repo rates from the key central bank target rates. Specifically, the thesis shows how asset eligibility to the ECB's APPs generates dispersion in repo rates between transactions secured by collateral that is eligible and non-eligible for asset purchases. By purchasing assets in large quantities, the national central banks decreased the available supply of eligible securities in the repo market, rendering them more special and decreasing the repo rates. Using a large micro dataset with daily transaction data in the German repo market, the thesis estimates that repo transactions secured by eligible collateral to the APPs have, on average, a 10 basis points lower rate than transactions with non-eligible collateral.