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Repo market functioning: The role of capital regulation

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  • Kotidis, Antonis
  • Van Horen, Neeltje

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.

Suggested Citation

  • Kotidis, Antonis & Van Horen, Neeltje, 2018. "Repo market functioning: The role of capital regulation," CEPR Discussion Papers 13090, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13090
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    References listed on IDEAS

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    Cited by:

    1. Behn, Markus & Mangiante, Giacomo & Parisi, Laura & Wedow, Michael, 2019. "Behind the scenes of the beauty contest: window dressing and the G-SIB framework," Working Paper Series 2298, European Central Bank.

    More about this item

    Keywords

    Capital regulation; leverage ratio; non-bank financial institutions; repo market;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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