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Leverage ratio, central bank operations and repo market

Annalisa Bucalossi () and Antonio Scalia ()
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Annalisa Bucalossi: Bank of Italy

No 347, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Using estimates of the Basel III leverage ratio, we show the rapid convergence of banks in the euro area towards levels well above the preliminary 3 per cent threshold. Contrary to predictions that the new requirement might interfere with the conduct of monetary policy and its transmission via the money market, throughout 2014 we find that leverage-constrained banks have decreased neither Eurosystem refinancing nor trading volume on repo markets. We measure the extent to which banks in the euro area have until now benefited from improvements in their regulatory capital, the low reporting frequency of the leverage ratio, and the favourable treatment of repo and derivatives trades with central counterparties in calculating the ratio, achieving an average of 5 per cent at end-June 2015. This level is likely to fall to around 4.5 per cent by March 2017, as a consequence of the Eurosystem Asset Purchase Programme, which causes an expansion of banks’ balance sheets and, therefore, an increase in the denominator of the leverage ratio.

Keywords: Basel III; leverage ratio; central bank operations; European banks; repo market (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 G1 (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-cba, nep-eec, nep-fmk, nep-mac and nep-mon
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