The Leverage Ratio and Liquidity in the Gilt and Repo Markets

56 Pages Posted: 9 Nov 2017 Last revised: 19 Dec 2017

Date Written: November 3, 2017

Abstract

Market participants have argued that a significant unintended consequence of post-crisis regulatory leverage ratio requirements has been a reduction in the liquidity of fixed income markets. We assess this claim in the context of the gilt (UK government bond) and gilt repo markets. We find that gilt repo liquidity worsened during the period when UK leverage ratio policy was announced, and that gilt liquidity worsened conditional on factors such as funding costs and inventory risk. We also find evidence that gilt repo liquidity has become less resilient. However, evidence from heterogeneity in dealer behaviour is inconclusive regarding a causal link between leverage ratio requirements and the reduction in market liquidity.

Keywords: Market Liquidity, Leverage Ratio, Bank Regulation, Repo, Gilt Market, Market-Making

JEL Classification: G12, G21, G24, G28

Suggested Citation

Bicu, Andreea and Chen, Louisa and Elliott, David, The Leverage Ratio and Liquidity in the Gilt and Repo Markets (November 3, 2017). Bank of England Working Paper No. 690, Available at SSRN: https://ssrn.com/abstract=3066859 or http://dx.doi.org/10.2139/ssrn.3066859

Andreea Bicu (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Louisa Chen

Independent ( email )

David Elliott

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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