The market for a key funding instrument for banks in Europe has shrunk, highlighting how reliant financial institutions in the region have become on European Central Bank support.

The market for European repurchase – repo – transactions contracted by an estimated 14.2 per cent year-on-year in the six months to June 30, based on constant samples over the period.

The total value of outstanding repo contracts – in which banks pledge their securities as collateral for short-term loans from money market funds or other investors – stood at €5.6bn in June, according to the latest twice yearly snapshot of the market by the European Repo Council of the International Capital Market Association. Richard Comotto, senior visiting fellow at the ICMA centre at Reading University, said that while repo markets were vulnerable to swings, the most recent contraction highlighted how dependent banks in the region had become on ECB funding.