Do Higher Capital Standards Always Reduce Bank Risk? The Impact of the Basel Leverage Ratio on the U.S. Triparty Repo Market

M. Allahrakha, Jill Cetina and Benjamin Munyan (benjamin.munyan@ofr.treasury.gov)
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Benjamin Munyan: Office of Financial Research

No 16-11, Working Papers from Office of Financial Research, US Department of the Treasury

Abstract: While simpler than risk-based capital requirements, the leverage ratio may encourage bank risktaking. This paper examines the activity of broker-dealers affiliated with bank holding companies (BHCs) and broker-dealers not affiliated with BHCs in the repurchase agreement (repo) market to test whether this may be occurring. Using data on the triparty repo market, the paper arrives at three findings. First, following the 2012 introduction of the supplementary leverage ratio (SLR), broker-dealer affiliates of BHCs decreased their repo borrowing but increased their use of repo backed by more price-volatile collateral. Second, the paper finds that regardless of whether a U.S. BHC-affiliated broker-dealer parent is above or below the SLR requirement, the announcement of the SLR rule has disincentivized those dealers affiliated with BHCs from borrowing in triparty repo. Finally, the paper finds an increase in the number of active nonbankaffiliated dealers in certain asset classes of triparty repo since the 2012 introduction of the supplementary leverage ratio. This suggests risks may be shifting outside the banking sector.

Keywords: Banking; leverage ratio; heightened prudential regulation; repurchase agreement; global systemically important banks (search for similar items in EconPapers)
Pages: 41 pages
Date: 2016-11-10
New Economics Papers: this item is included in nep-ban and nep-rmg
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Citations: View citations in EconPapers (12)

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Journal Article: Do higher capital standards always reduce bank risk? The impact of the Basel leverage ratio on the U.S. triparty repo market (2018)
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