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Discussion Paper Details

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Title: Repo market functioning: The role of capital regulation

Author(s): Antonis Kotidis and Neeltje Van Horen

Publication Date: July 2018

Keyword(s): Capital regulation, leverage ratio, non-bank financial institutions and repo market

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Kotidis, A and Van Horen, N. 2018. 'Repo market functioning: The role of capital regulation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13090