Repo Market Functioning: The Role of Capital Regulation

52 Pages Posted: 3 Aug 2018

See all articles by Neeltje van Horen

Neeltje van Horen

affiliation not provided to SSRN

Antonis Kotidis

University of Bonn

Date Written: August 3, 2018


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.

Keywords: Capital regulation, leverage ratio, repo market, non-bank financial institutions

JEL Classification: G10, G21, G23

Suggested Citation

Horen, Neeltje van and Kotidis, Antonis, Repo Market Functioning: The Role of Capital Regulation (August 3, 2018). Bank of England Working Paper No. 746. Available at SSRN: or

Neeltje van Horen (Contact Author)

affiliation not provided to SSRN

No Address Available

Antonis Kotidis

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012

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