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The repo market under Basel III

Eddie Gerba () and Petros Katsoulis ()
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Eddie Gerba: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Petros Katsoulis: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 954, Bank of England working papers from Bank of England

Abstract: This paper assesses the impact of banking regulation (Basel III) on financial market dynamics using the repo market as an important case study. To this end, we use unique proprietary data sets from the Bank of England to examine the individual and joint impact of leverage, capital and liquidity coverage ratios on participants’ trading in all collateral segments of the UK repo market. We find non-uniform effects across ratios and participants and non-linear effects across time. For instance, we find that the leverage ratio induces participants to charge lower (higher) interest margins on repo (reverse repo) trades that are non-nettable compared to the nettable ones. Second,we document a change in market microstructure under the new regulatory regime. Specifically, we evidence a substitution effect of banks’ long-term repo borrowing backed by gilts from dealers to investment funds which can be fragile during times of stress. Likewise, we find an increasing prominence of central counterparties. Third, we find evidence that participants who are jointly constrained by multiple ratios and closer to the regulatory thresholds during times of stress reduce their activity to a greater extent than those that are constrained by a single ratio or not constrained, with implications for market liquidity.

Keywords: Banking regulation; repo market; market microstructure; liquidity; monetary policy transmission (search for similar items in EconPapers)
JEL-codes: E44 E52 G11 G21 G28 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2021-12-17
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-fmk, nep-his, nep-mac, nep-mon, nep-reg and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0954

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