Furthermore, as the economic recovery continues, bank profitability will increase, bolstering equity. With less constrained equity, conditions will become more favourable for a return to more unsecured lending. 4/5  BIS central bankers' speeches  Conclusion Let me conclude. Banks and other market participants report a decrease in market making activities and collateral scarcity in repo-markets. The perception of a challenging environment can therefore not be denied. Pro-cyclical market reactions during and after the financial crisis and – related – changes in banking regulation clearly had an impact on the functioning of the repo markets. But with the continued economic recovery market stress should fade and conditions for unsecured lending might re-gain some attractiveness. Likewise, market players will adjust their business models over time amid a new regulatory environment. Regarding the ECB’s asset purchase program, two important points have to be made: 1. Although the APP might have some negative side effects on the functioning of the repo market as compared to the pre-crisis levels, other more potent factors were at work. To reduce spill-over effects the ECB has also introduced several mitigation measures. 2. Even more important: the ECB has one mandate, which is to ensure price stability. Elevated risks to its goal have made unconventional measures necessary on an unpreceded scale and on a temporary basis. And they prove successful. Although we try to minimise negative side effects, any of these considerations are without prejudice to the obligation to honour our mandate. 3. 1 Rates based on RepoFunds Germany, France, Italy and Spain.

Contributing factors to the current situation in repo market Let me now review some medium to long-term trends contributing to the current situation in the repo market, affecting both the supply and demand of collateral. It should first be noted that the repo market has seen a reduction in its role for funding, also due to the excess liquidity injected and the securities absorption implied by APP. On the supply side, the availability of high-quality collateral is inevitably pro-cyclical. From a pure economic view point, the financial crisis, its length, rising debt levels and rating downgrades to sovereigns reduced the amount of available assets that are considered ‘safe’, particularly for non-banks (although regulators treat all sovereigns as risk-free). This is most easily visible in the current clustering of GC collateral rates by country of issuer, which was largely absent prior to the crisis. On the demand side, the evolution of prudential regulation has affected the repo market. A number of features, which have in principle been known since the reform of Basel III in 2010, are still being phased in and directly affect banks’ participation in the repo markets, particularly the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). A third measure – the leverage ratio – is now subject to reporting requirements, but there is not as yet an agreed international regulatory standard. The LCR requires banks to hold sufficient high-quality liquid assets (HQLA) to cover projected net cash outflows.