Adrien Verdelhan's webpage

Repo and FX Swap: A Tale of Two Markets

Abstract:
We study euro-area banks’ dollar funding in repo and euro-dollar FX swap markets over the 2021–2024 period using the first linked transaction-level dataset of these markets. The two markets are close substitutes at the net position level, despite gross exposures of about e2 trillion. Balance sheet costs show up mainly in repo: lending–borrowing spreads are about 9 basis points in repo but only about 1 basis point in FX swaps, and matched-book intermediation earns roughly 10 basis points. Dealer market power is concentrated in FX swaps against non-financial corporations and is much weaker in repo. Around quarter-ends, funding costs rise and dealers reallocate roughly e40 billion from FX swap to repo net lending, as predicted by a simple two-market model, but sectoral markups do not widen systematically.