Leverage Regulations and Treasury Market Participation: Evidence from Credit Line Drawdowns

37 Pages Posted: 4 Aug 2022 Last revised: 16 Dec 2022

See all articles by Giovanni Favara

Giovanni Favara

Board of Governors of the Federal Reserve System

Sebastian Infante

Board of Governors of the Federal Reserve System

Marcelo Rezende

Board of Governors of the Federal Reserve System

Date Written: July 28, 2022

Abstract

We examine the effects of the supplementary leverage ratio (SLR) on large banks’ participation in U.S. Treasury markets. Exploiting exogenous shocks to credit line drawdowns and data on bank’s holdings of Treasury securities, we show that an increase in banks’ balance sheet size reduces their incentives to participate in the Treasury market. This effect is weaker for banks with higher SLRs and muted when a regulatory change excluded Treasury securities from the computation of the SLR. Accounting for regulatory liquidity or risk-based capital ratios does not change these results. These findings support the hypothesis that banks’ ability to participate in markets for safe assets may be curtailed by leverage regulations.

Keywords: Credit lines, Treasury securities, supplementary leverage ratio

JEL Classification: G21, G28

Suggested Citation

Favara, Giovanni and Infante, Sebastian and Rezende, Marcelo, Leverage Regulations and Treasury Market Participation: Evidence from Credit Line Drawdowns (July 28, 2022). Available at SSRN: https://ssrn.com/abstract=4175429 or http://dx.doi.org/10.2139/ssrn.4175429

Giovanni Favara

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.giovannifavara.com

Sebastian Infante (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://sites.google.com/site/sebinfante/home

Marcelo Rezende

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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