Repo Market and Leverage Ratio in the Euro Area

37 Pages Posted: 28 May 2020

Date Written: March 18, 2020

Abstract

This paper provides new evidence on the effect of the leverage ratio (LR) on repo market activity in the euro area. The share of trades with central counterparties has increased in recent years as a result of greater regulatory efficiency. After controlling for factors that may affect participation in the repo market, banks are found to exert market power towards non-bank financial institutions by applying lower rates and larger bid-ask spreads. While there is a permanent rate differential between transactions conducted via CCPs – which can easily be netted for LR purposes - and those with non-banks, on average this differential and the bid-ask spread do not increase at quarter-end. The widening of the bid-ask spread at year-end is sizeable, but this is not necessarily due to the LR, since other important factors enter into play. This evidence lessens the concern that the additional LR reporting and disclosure requirements based on daily averages, which will take effect on June 2021, might cause a contraction in repo volume and greater rate dispersion.

Keywords: repo market, leverage ratio, monetary policy transmission

JEL Classification: E4, E5, G2

Suggested Citation

Pasqualone, Filippo and Baldo, Luca and Scalia, Antonio, Repo Market and Leverage Ratio in the Euro Area (March 18, 2020). Bank of Italy Occasional Paper No. 551, Available at SSRN: https://ssrn.com/abstract=3612739 or http://dx.doi.org/10.2139/ssrn.3612739

Filippo Pasqualone (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Luca Baldo

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Antonio Scalia

Bank of Italy ( email )

Financial Risk Management
Via Nazionale 91
Rome, 00184
Italy
+39 06 4792 3390 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
16
Abstract Views
101
PlumX Metrics