Repo market vulnerabilities pose global financial stability risks, FSB warns
The Financial Stability Board (FSB) today published a report warning of significant vulnerabilities in government bond-backed repo markets. The report highlights how leverage, demand-supply imbalances, and high concentration could create systemic strains.
The triple threat in repo markets
The report identifies three core vulnerabilities within government bond-backed repo markets.
First, these markets facilitate significant leverage, with approximately 70 percent of non-centrally cleared activity operating with zero haircuts and high levels of collateral rehypothecation.
Second, demand and supply imbalances can emerge rapidly during stress periods, as lenders become unwilling or unable to provide necessary liquidity.
Third, repo markets exhibit high concentration across various dimensions, raising the risk of disruptions in the event of failures.
The FSB estimates that around $16 trillion in government bond-backed repo trades were outstanding at the end of 2024, representing 80 percent of all repo trades.
A call for stronger market resilience
Strains in repo and government bond markets can act as a conduit, spreading shocks across the financial system and multiple jurisdictions.
The report outlines several measures for authorities.
These include closing data gaps, strengthening surveillance capabilities, and addressing vulnerabilities related to liquidity imbalances and leverage.
The FSB specifically references its recommendations on leverage in nonbank financial intermediation (NBFI) and other relevant international standards to enhance market resilience.