Events

Professor Wenxin Du
Professor of Finance
Sylvan C. Coleman Professor of Financial Management
Harvard Business School
Harvard University

Using actual transactions of large euro-area banks in US dollar-denominated repo and euro-dollar foreign exchange (FX) swap markets, we document new stylized facts about these two key segments of the global funding market. First, we show that for large euro-area banks, the repo and FX swap markets serve as close substitutes, with net borrowing in the repo market closely tracking net lending in the FX swap market. Second, the average spread between borrowing and lending rates in the repo market is significantly wider than in the FX swap market, reflecting the higher balance sheet costs of repos for dealers. Third, dealers exercise market power in both markets, as evidenced by significant price dispersion across counterparty types despite similar balance sheet usage. We interpret these findings through the lens of a simple two-market model and use the model’s predictions to test dynamics between the two markets during stress days.