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
EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.
In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.
IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.
FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.
EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.
FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.
RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.
The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.
HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.
ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).