Do Higher Capital Standards Always Reduce Bank Risk? The Impact of the Basel Leverage Ratio on the U.S. Triparty Repo Market

41 Pages Posted: 14 Nov 2016

See all articles by Meraj Allahrakha

Meraj Allahrakha

International Monetary Fund (IMF) - Statistics Department; George Mason University - Department of Computational Social Science; George Washington University - Department of Economics

Jill Cetina

Government of the United States of America - Office of Financial Research

Benjamin Munyan

Vanderbilt University - Finance

Multiple version iconThere are 2 versions of this paper

Date Written: November 10, 2016

Abstract

While simpler than risk-based capital requirements, the leverage ratio may encourage bank risk-taking. This paper examines the activity of broker-dealers affiliated with bank holding companies (BHCs) and broker-dealers not affiliated with BHCs in the repurchase agreement (repo) market to test whether this may be occurring. Using data on the triparty repo market, the paper arrives at three findings. First, following the 2012 introduction of the supplementary leverage ratio (SLR), broker-dealer affiliates of BHCs decreased their repo borrowing but increased their use of repo backed by more price-volatile collateral. Second, the paper finds that regardless of whether a U.S. BHC-affiliated broker-dealer parent is above or below the SLR requirement, the announcement of the SLR rule has disincentivized those dealers affiliated with BHCs from borrowing in triparty repo. Finally, the paper finds an increase in the number of active nonbank-affiliated dealers in certain asset classes of triparty repo since the 2012 introduction of the supplementary leverage ratio. This suggests risks may be shifting outside the banking sector.

Keywords: Banking, leverage ratio, heightened prudential regulation, repurchase agreement, global systemically important banks

JEL Classification: G28, G21, G23

Suggested Citation

Allahrakha, Meraj and Cetina, Jill and Munyan, Benjamin K., Do Higher Capital Standards Always Reduce Bank Risk? The Impact of the Basel Leverage Ratio on the U.S. Triparty Repo Market (November 10, 2016). OFR WP 16-11, Available at SSRN: https://ssrn.com/abstract=2869140 or http://dx.doi.org/10.2139/ssrn.2869140

Meraj Allahrakha (Contact Author)

International Monetary Fund (IMF) - Statistics Department ( email )

Washington, DC
United States

George Mason University - Department of Computational Social Science

4400 University Drive
Research I, CSC Suite, Level 3
Fairfax, VA 22030
United States

George Washington University - Department of Economics

Monroe Hall, Suite 340
2115 G Street, NW
Washington, DC 20052
United States

Jill Cetina

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

Benjamin K. Munyan

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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