Big investors, including hedge funds, mutual funds and real estate trusts, are replacing banks as the biggest users of the overnight funding market that played a key role in the financial crisis.

The repo market, in which borrowers pledge securities as collateral against very short-term loans, was once a popular method for banks to source cheap financing. But the strategy proved destabilising in 2008, when lenders in the repo market lost confidence in mortgage-backed collateral and pulled back on funding.

Since 2008, the repo market has been shrinking as banks have shifted to longer-term financing in response to new regulatory capital rules and other post-crisis pressures. What remains of the $4.2tn market is increasingly being taken up by non-bank entities such as real estate investment trusts (Reits), mutual funds and hedge funds.