LONDON Feb 14 Problems banks and big businesses
encountered raising short-term funding in Europe at the end of
last year could become "a new normal" and pose a systemic risk
to the functioning of markets, trade association ICMA said on
A bond drought partly caused by the European Central Bank's
quantitative easing scheme created in late December a crunch in
repurchase agreements, or repo, which firms use to raise cash
"The extreme volatility and market dislocation experienced
in the euro repo market over the 2016 year-end are unprecedented
in the post-euro era," the International Capital Market
Association (ICMA) said.
"This has raised concerns over whether this was a one-off
event, or rather this is an indication of a market that no
longer functions efficiently and effectively under stressed
conditions, and signals a new normal for the European short-term
funding and collateral markets."
ICMA, which has raised its concerns with European
authorities, said the problems were caused by a combination of
the ECB's asset purchase scheme - scheduled to run until at
least the end of 2017 - and regulation that limits banks'
balance sheets and ability to intermediate in repo markets.
The ECB introduced a bond-for-cash scheme in December to try
and alleviate stress in repo markets, but the effectiveness of
that programme has been called into question by the recent
Godfried de Vidts, chairman of ICMA's European Repo and
Collateral Council, said not addressing the problems could have
dire consequences for the functioning of markets.
"If some of the participants, even a medium-sized bank,
cannot fulfil their obligations, in principle that clearing
house should close out that bank because they are in default.
That could create a snowball effect," said de Vidts.
"A two- to three-day pressure like we have seen should not
be repeated because it really could expose the market to dangers
that we don't really want to think about because it would stop
the system functioning."
(Reporting by John Geddie; editing by John Stonestreet)