Banks Shift Repo Market Balance from Settlement Balances to Other Mechanisms

The Canadian repo market relies heavily on banks and their dealers' arms to balance clients' demand. Repo market imbalances can be large and persistent, putting upward pressure on short-term funding costs in Canada, including the CORRA benchmark.

A Bank of Canada staff analytical paper (2026-40) examines the main funding sources that banks use to absorb these imbalances. During quantitative easing (QE) and early quantitative tightening (QT), banks' holdings of settlement balances were a key buffer to absorb clients' net repo demand, but by the end of QT they had become far less central.

Despite this shift, banks and dealers accommodate increasingly volatile shifts in their clients' repo demand through a more active redistribution among them, a somewhat more active use of foreign currency markets, and a more active use of the Receiver General (RG) and Bank of Canada (BoC) facilities.