Repo Market Functioning: The Role of Capital Regulation

54 Pages Posted: 6 Aug 2018

See all articles by Antonis Kotidis

Antonis Kotidis

University of Bonn

Neeltje van Horen

Bank of England; Centre for Economic Policy Research (CEPR)

Date Written: July 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, non-bank financial institutions, repo market

JEL Classification: G10, G21, G23

Suggested Citation

Kotidis, Antonis and van Horen, Neeltje, Repo Market Functioning: The Role of Capital Regulation (July 2018). CEPR Discussion Paper No. DP13090. Available at SSRN:

Antonis Kotidis (Contact Author)

University of Bonn ( email )

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

Neeltje Van Horen

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

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