by market observers, practitioners and academics alike as potentially challenging the intermediation capacity of repo markets, namely central bank asset purchases and post - crisis prudential regulation. 3 i will show that the ecb ’ s asset purchase programme ( app ) left a visible footprint in the repo market, but that last year ’ s modifications to our securities lending facility contributed to restoring an appropriate balance between ensuring the effectiveness of our measures and the smooth functioning of repo markets. i will also provide empirical evidence that challenges the view that financial regulation has adversely impacted repo market activity so far. but i will also argue that further evidence is needed to draw conclusions on this matter. 1 / 10 bis central bankers'speeches asset purchases and repo market activity let me start with the impact of central bank asset purchases on recent repo market activity. asset purchases may have two broad effects on repo markets. the first is their impact on excess liquidity. with central banks exchanging large amounts of reserves for longer - dated securities, banks may no longer need to tap the interbank market, both secured and unsecured, to manage their short - term liquidity needs. as a result, trading volumes may fall. the second effect is closer to one of the main transmission channels of asset purchase programmes, namely portfolio rebalancing. in imperfect financial markets, those in need of scarce securities, or those who have a special preference for them, need to bid harder to obtain them, thereby pushing up their price and lowering their yield – which then delivers financial conditions supportive of higher output and prices in the real economy. there is growing empirical evidence that this channel has been very effective in the euro area. 4 the flip side to this is that, although purchases are conducted in the secondary cash market, price adjustments in this market can also be expected to affect conditions in the repo market. a simple way to think about this is through short - selling. bonds being richer in the cash market will make it more difficult to borrow them via reverse repos. this should also push up the price in the repo market, all else equal. in addition, investors who own more expensive securities should be able to profit from them by obtaining lower funding costs in the repo market. in other words, because the cash and the repo market often intermediate the same asset, it is natural that changes in one market may have repercussions in the other. 5 both effects have clearly left a footprint in the

, generally willing to provide them in sufficient quantity in the repo market. 10 yet, this chart also reinforces the point i made earlier about the flow and stock effects of our purchases : with the effective supply of bonds gradually shrinking over time as a result of our purchases, specialness premia have been persistently inching upwards. 11 while stock effects reinforce one of the key transmission channels of the app by increasing the “ value for money ” – the bang for the buck – of new net purchases in terms of their impact on financial conditions, we also need to be mindful that a shortage of government bonds may over time adversely affect the intermediation capacity of repo markets. there are two reasons for this. first, government bonds are the main type of collateral used in repo markets, primarily because of their safety and liquidity. according to mmsr data, euro area government bonds represent more than 80 % of the collateral used. second, the supply of safe private collateral is necessarily scarce12, while the supply of safe public collateral has fallen on account of both a decline in net issuance and the downgrades in sovereign credit ratings. for example, the share of euro area bonds rated aaa by at least two rating agencies has fallen from levels around 60 % before the great financial crisis to around 20 % today. in other words, safe debt is in short supply and debt in long supply is less safe. 13 this is also why the governing council ’ s decision of 26 october, when it decided to extend the horizon of its asset purchases by another nine months, and to reduce the pace of monthly purchases to €30 billion, emphasised the contribution of the stock of acquired assets, together with forthcoming reinvestments, to providing continued monetary support. 6 / 10 bis central bankers'speeches financial regulation and repo market activity asset purchases are not the only factor affecting supply and demand conditions in cash and repo markets. this brings me to the second part of my remarks. as you know, a number of liquidity regulations affecting banks, such as the net stable funding ratio ( nsfr ) and the liquidity coverage ratio ( lcr ), require banks to hold a sufficient quantity of high - quality liquid assets. at face value, these regulations could be expected to have contributed to bumping up demand for government bonds, thereby reinforcing the effects of the ecb ’ s app. but because, as a result of our asset purchases, banks hold a large amount