Bank Capital Regulation and Derivatives Clearing

Abstract

As part of the post global financial crisis reforms, regulators introduced a leverage ratio requirement, a minimum capital requirement over a bank's total exposures. We assess the consequences of this requirement for derivative clearing services to clients, which creates exposures for the dealers, by exploiting its earlier introduction in the United Kingdom and detailed confidential transaction and portfolio data. UK dealers reduce their client clearing business following the introduction of the requirement, particularly dealers with lower capital positions and for longer-term derivatives; they are also more likely to end client relationships. Capital regulation might indirectly limit access to clearing services.

Keywords: financial regulation, leverage ratio, Derivatives, clearing, Banking