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Repo market and leverage ratio in the euro area

Author

Listed:
  • Luca Baldo

    (Bank of Italy)

  • Filippo Pasqualone

    (Bank of Italy)

  • Antonio Scalia

    (Bank of Italy)

Abstract

This paper provides new evidence on the effect of the leverage ratio (LR) on repo market activity in the euro area. The share of trades with central counterparties has increased in recent years as a result of greater regulatory efficiency. After controlling for factors that may affect participation in the repo market, banks are found to exert market power towards non-bank financial institutions by applying lower rates and larger bid-ask spreads. While there is a permanent rate differential between transactions conducted via CCPs – which can easily be netted for LR purposes - and those with non-banks, on average this differential and the bid-ask spread do not increase at quarter-end. The widening of the bid-ask spread at year-end is sizeable, but this is not necessarily due to the LR, since other important factors enter into play. This evidence lessens the concern that the additional LR reporting and disclosure requirements based on daily averages, which will take effect on June 2021, might cause a contraction in repo volume and greater rate dispersion.

Suggested Citation

  • Luca Baldo & Filippo Pasqualone & Antonio Scalia, 2020. "Repo market and leverage ratio in the euro area," Questioni di Economia e Finanza (Occasional Papers) 551, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_551_20
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2020-0551/QEF_551_20.pdf
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    More about this item

    Keywords

    repo market; leverage ratio; monetary policy transmission;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G2 - Financial Economics - - Financial Institutions and Services

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