At the same time, however, the reliance on secured financing provides a powerful channel of transmission of shocks in the financial system. The decline in collateral values translates in additional collateral calls possibly compounded with higher haircuts and margins requirements. A system in which financial institutions rely substantially on secured lending tends to be more pro-cyclical than otherwise.
Government bonds accounts for two third of the EU-originated collateral used in repo transactions.4 The powerful shock amplification system of these markets became particularly evident over the last couple of years with the loss in value of the debt of some euro area countries.