BoE Publishes Paper on the Role of Capital Regulation in Repo Markets
BoE published a staff working paper that examines the role of capital regulation in the functioning of the repurchase agreement (repo) market. The paper shows that the leverage ratio affects repo intermediation for banks and non-bank financial institutions.
The paper reviews the related literature that studies the repo market. Next, the paper describes the gilt repo market and how the leverage ratio affects repo market intermediation. It then outlines the empirical methodology and describes the Sterling Money Market database that is being used. The study exploits 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. The paper moves on to present and discuss the empirical findings and analyzes the aggregate effect and market adjustment. Finally, it concludes and discusses the policy implications of the findings of this study.
Studying adjustments at the dealer-client level and controlling for demand and confounding factors, it was found that dealers subject to a more binding leverage ratio reduced liquidity in the repo market; this affected their small, but not the large, clients. The study documents a reduction in frequency of transactions and a worsening of repo pricing, but no adjustment in haircuts or maturities. Finally, evidence of market resilience is found, based on existing, rather than new repo relationships, with foreign, non-constrained dealers stepping in. Overall, the findings help shed light on the impact of Basel III capital regulation on repo markets.
Related Links
Keywords: Europe, UK, Banking, Securities, Capital Regulation, Basel III, Leverage Ratio, Repo Market, BoE
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.