Europe's repo market shrinks 12% Europe's repo market, the main source of short-term funding for banks, contracted last year, suggesting that risk-averse banks are relying on the cheap loans supplied by the region's central banks rather than lending to each other. The total value of outstanding European repurchase, or repo contracts - whereby banks pledge securities as collateral in return for funding from money market managers and other investors - stood at €5.6tn in December, down from a high of €6.2tn a year earlier. Based on a constant sample over the period, the repo market dropped 11.9 per cent in the year to December 2012, according to the latest bi-annual survey by the European Repo Council of the International Capital Market Association. Richard Comotto, senior visiting fellow at the ICMA Centre at Reading University and author of the report, said the bigger worry is that the repo market - a key source of funding for the banks - is shrinking at a time when governments are keen to see banks wean themselves off central bank funding. He said that while markets had received a boost from October's ECB pledge to backstop the euro, the longer-term refinancing operations (LTRO) had reduced the need for banks to access other sources of funding. The latest "significant" fall in the volume of repo transactions pointed to a "stagnant" market, reflecting "a general decline in liquidity even as confidence in the wider market was improving," Mr Comotto added. While the size of the repo market is still above the 2008 low that followed the collapse of Lehman Brothers, the latest figures demonstrate how the eurozone crisis and action from central banks are affecting the ways financial institutions operate. The repo market offers a useful gauge of the health of the eurozone financial system and has a role to play in the flow of funds into the real economy. Banks borrowed more than a €1tn via the European Central Bank's LTRO in December 2011 and February 2012. Some banks have this year started to repay the ECB loans, but many lenders in Spain and Italy remain heavily reliant on the LTRO. In the UK, lenders have taken advantage of the Bank of England's "funding for lending" scheme.