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
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
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Working Paper: Repo market functioning: the role of capital regulation (2018)
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