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.
Keywords: Europe, UK, Banking, Securities, Capital Regulation, Basel III, Leverage Ratio, Repo Market, BoE
ECB finalized the guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk (CCR) and the advanced method for own funds requirements for credit valuation adjustment (A-CVA) risk.
EBA published an Opinion addressed to EC to raise awareness about the opportunity to clarify certain issues related to the definition of credit institution in the upcoming review of the Capital Requirements Directive and Regulation (CRD and CRR).
APRA is consulting on updates to ARS 210.0, the reporting standard that sets out requirements for provision of information on liquidity and funding of an authorized deposit-taking institution.
FED released hypothetical scenarios for a second round of stress tests for banks.
PRA published updates in relation to the 2021 Supervisory Benchmarking Portfolio exercise.
FED adopted a proposal to extend for three years, with revision, the capital assessments and stress testing reports (FR Y-14A/Q/M; OMB No. 7100-0341).
HKMA revised the Supervisory Policy Manual module CR-G-14 on margin and other risk mitigation standards for non-centrally cleared over-the-counter (OTC) derivatives transactions.
EBA issued a revised list of validation rules with respect to the implementing technical standards on supervisory reporting.
EBA published its response to the call for advice of EC on ways to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT).
NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies.