Working Paper: CEPR ID: DP13090
Authors: Neeltje van Horen; Antonis Kotidis
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; repo market; nonbank financial institutions
JEL Codes: G10; G21; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Leverage ratio (G32) | Repo market liquidity (E43) |
| Leverage ratio (G32) | Repo volumes (C59) |
| Leverage ratio (G32) | Transaction frequency (E42) |
| Leverage ratio (G32) | Repo pricing (G13) |