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Regulatory Arbitrage in the Repo Market

Author

Listed:
  • Benjamin Munyan

    () (Office of Financial Research
    Vanderbilt University)

Abstract

Non-U.S. banks with relatively low capital ratios appear to temporarily remove an average of $170 billion from the U.S. market for tri-party repurchase agreements (repo) before each quarter-end in order to appear safer and less levered. This amount is more than double the $76 billion market-wide drop in tri-party repo during the turmoil of the 2008 financial crisis and represents about 10% of the entire tri-party repo market. Such window dressing-induced deleveraging spills over into agency bond markets and money market funds and affects market liquidity each quarter.

Suggested Citation

  • Benjamin Munyan, 2015. "Regulatory Arbitrage in the Repo Market," Working Papers 15-22, Office of Financial Research, US Department of the Treasury.
  • Handle: RePEc:ofr:wpaper:15-22
    as

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    File URL: https://www.financialresearch.gov/working-papers/files/OFRwp-2015-22_Repo-Arbitrage.pdf
    File Function: First version, 2015
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Marco Macchiavelli & Thomas Keating, 2017. "Interest on Reserves and Arbitrage in Post-Crisis Money Markets," Finance and Economics Discussion Series 2017-124, Board of Governors of the Federal Reserve System (US).
    2. Van Horen, Neeltje & Kotidis, Antonis, 2018. "Repo market functioning: the role of capital regulation," Bank of England working papers 746, Bank of England.
    3. repec:ofr:report:16-3 is not listed on IDEAS
    4. repec:eee:jfinin:v:34:y:2018:i:c:p:3-16 is not listed on IDEAS
    5. Allahrakha, Meraj & Cetina, Jill & Munyan, Benjamin, 2018. "Do higher capital standards always reduce bank risk? The impact of the Basel leverage ratio on the U.S. triparty repo market," Journal of Financial Intermediation, Elsevier, vol. 34(C), pages 3-16.

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