"The absence of a repo market harms the functioning of the capital market, and is one of the causes of the low liquidity of the government bond market."
Control by the banks of most activity in securities is preventing the development of a repo transactions market, and harming the functioning of the capital market, which is still underdeveloped. The absence of a repo market, which enables securities-for-cash deals to be transacted, is one of the causes for the relatively low liquidity of the government bond market. This was determined by the Bank of Israel in a special report published on the development of the worldwide repo market, in particular the US market.
The repo deal market is one of the developed financial markets in the world capital markets, especially in the US, where the balance of these transactions reached $2.4 trillion in 1999. A Repo transaction is a form of granting and receiving loans, which competes with the banking system. The existence of such deals is likely to lower interest rates to borrowers and increase the interest rate to depositors.
According to the Bank of Israel, development of a repo market in Israel will increase competition with the banks and facilitate better asset portfolio management by institutional investors. Such a market will also lead to a lowering of interest rates collected by the banks on their loans and a rise in interest rates granted to depositors. The Bank of Israel also claims that the existence of such a market in 1996 would have avoided the provident fund crisis and prevented fluctuations in bond quotations.
Published by Israel's Business Arena on July 18, 2000