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Repo market functioning: The role of capital regulation

Antonis Kotidis and Neeltje Van Horen ()

No 13090, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper shows that the leverage ratio affects repo intermediation for banks and non-bank financial institutions. We exploit a novel regulatory change in the UK to identify an exogenous intensification of the leverage ratio and combine this with supervisory transaction-level data capturing the near-universe of gilt repo trading. Studying adjustments at the dealer-client level and controlling for demand and confounding factors, we find that dealers subject to a more binding leverage ratio reduced liquidity in the repo market. This affected their small but not their large clients. We further document a reduction in frequency of transactions and a worsening of repo pricing, but no adjustment in haircuts or maturities. Finally, we find evidence of market resilience, based on existing, rather than new repo relationships, with foreign, non-constrained dealers stepping in. Overall, our findings help shed light on the impact of Basel III capital regulation on repo markets.

Keywords: Capital regulation; leverage ratio; non-bank financial institutions; repo market (search for similar items in EconPapers)
JEL-codes: G10 G21 G23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
Date: 2018-07
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