Capital markets union and the free flow of collateral

Policy Study

15/09/2016

The Capital Markets Union (CMU) proposal marks two accomplishments. First, it reframes securitisation (the pooling, repackaging and selling of loans) as a practice that can somehow be “simple, transparent and standardised” (STS), a shortcut to stimulating economic growth and job creation in Europe (Bavoso 2016, Engelen and Glassmacher 2016).

Second, it reframes repo markets as crucial to (STS) market liquidity and monetary policy transmission, with little if any reference to their role as sources of excessive leverage and procyclicality (ESRB 2015, Gabor 2016, Gabor and Vestergaard 2016).

The CMU proposals, we argue, marked a renewed political commitment to integrated European markets for repurchase agreements (repo), away from early post-crisis efforts to tax or regulate money market funding of capital market lending (Mehrling et al 2013). While we stress that a multiplicity of actors have interests at stake in integrated, non-regulated European repo markets, as the notion of a “repo bargain” implies (Gabor 2015), our empirical analysis focuses on the interventions of the private repo lobby, notably the European Repo Council (ERC), to confront and undermine an emerging discourse framing repo markets as sources of systemic risk, to be mitigated by regulatory measures such as minimum haircuts. The notion of collateral fluidity, promoted by the ERC in the Capital Markets Union agenda, became a conceptual cornerstone of the discursive trick that turned the tables.

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