The political turmoil that upended Spanish markets last month triggered a scramble among banks to find new sources of funding.

Volumes in European repo markets shot up in the weeks surrounding the Catalan independence referendum on Oct. 1, a vote that was declared illegal by Madrid and marred by violence as Spanish police charged against voters.

Markets for repo, or repurchase agreements, are a linchpin of financial markets in the developed world. They allow for banks and risk-hungry investors like hedge funds to obtain short-term cash at cheap rates in exchange for safe collateral.

The spike indicates Spanish banks were losing retail deposits, a source of long-term stable funding, traders said, and piling into wholesale money markets in search of an alternative source.

Although banks said the outflows were small, the issue underscores the potential problems for Spain’s economy as the standoff continues. Madrid in late October took full control of the Catalan regional government and jailed local officials.

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And while investors have sold Catalan bank stocks, the repo market offers a rare glimpse into the effects on the sector’s all-important depositors.


According to transactions processed by the BrokerTec platform operated by NEX Markets, volumes in European repo markets rose 30% in October from a year earlier, after a similar rise in September. The move was concentrated in Spain and is likely explained by the Catalan push for independence, NEX said.

The day after the vote, BrokerTec registered its highest daily volumes on record of term repo—funding of a maturity greater than one day, the most common in repo markets—hitting €1.14 trillion ($1.32 trillion), from an earlier peak of €646 billion in 2011.

Some Spanish banks confirmed they aggressively tapped wholesale markets in the week that followed the vote, as well as ensuring their access to the European Central Bank’s liquidity—eurozone banks asked for €21 billion from the ECB’s weekly liquidity auction on Oct. 10, roughly four times the usual uptake—largely to assuage the fears of large, wealthy depositors.

Outflows mostly stopped after that week, they added, especially after Catalonia’s two flagship banks—CaixaBank SA and Banco de Sabadell SA —said they were moving their legal headquarters away from the restive region. Around 2,200 companies have followed suit since the referendum, figures from the Spanish College of Mercantile Registers show.


In October, “Banco de Sabadell didn’t lead any extraordinary operation in the wholesale market beyond the increase driven by all Spanish banks in aggregate,” a spokeswoman said.

“We did see some movements of deposits during a few days, but really nothing material and things have really normalized after that,” Banco Bilbao Vizcaya Argentaria SA Managing Director Carlos Torres said.

CaixaBank declined to comment, but Managing Director Gonzalo Gortázar said two weeks ago the lender suffered “a moderate loss of customer funds,” but that it was “halted” after the decision to move the legal headquarters.

“It really puts us in the same position at any other Spanish bank that is now doing business in Catalonia,” Mr. Gortázar said.


Part of the growth in European repo markets can also be explained by banks adapting to new regulations: The size of the market was €6.4 trillion at the end of June, compared with €5.4 trillion in June 2016, according to the International Capital Market Association.

The political uncertainty surrounding the independence drive has roiled local markets. Since the start of September, Spain’s IBEX-35 stock market has dropped 1.1%, compared with a 4.7% gain for the broader Stoxx Europe 600.

Sabadell and CaixaBank are both down around 10% during this period, while shares in BBVA—now the top bank in the region by market share, despite its non-Catalan origins—have dropped 3.4%. By comparison, the wider index of eurozone lenders has traded broadly flat.

After Catalan banks moved their headquarters, some pro-independence activists called for a boycott of the lenders, but the impact on markets hasn’t been noticeable.


While the crisis could hurt the profitability of Spanish banks, access to the ECB makes major liquidity troubles unlikely, analysts said.

Spain has been the star performer in the eurozone in the last couple of years, but the Bank of Spain warned last week that the Catalan crisis could end up detracting up to 2.5 percentage points from the nation’s gross domestic product between this year and 2019—a 60% reduction in expected growth.

Write to Jon Sindreu at jon.sindreu@wsj.com