Analysis of risk factors in the Korean repo market based on US and European repo market experiences during the global financial crisis

Ronald Heijmans and Sung-guan Yun

Abstract

ABSTRACT

This paper identifies potential weaknesses in the Korean repurchasing agreement (repo) market and recommends measures to mitigate the risks associated with them. Repo markets were once deemed to be more resilient in the face of market instability than unsecured interbank money markets. However, the United States and Europe experienced prolonged investor demand for repos during the global financial crisis, which resulted in considerable volatility. By contrast, the Korean repo market has not yet seen any risks emerge. This is partly due to its small market size during the global financial crisis. However, there may be significant risks on the horizon due to
fragility arising from factors such as increased trade concentration. To mitigate such risks in the Korean repo market, we recommend (1) imposing a cap on the amount of borrowing, (2) limiting the proportion of illiquid collateral held by investors and (3) differentiating margin rates by type of security.