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The leverage ratio and liquidity in the gilt and gilt repo markets

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  • Bicu-Lieb, Andreea
  • Chen, Louisa
  • Elliott, David

Abstract

Market participants argue that a significant unintended consequence of post-crisis regulatory leverage ratio requirements is a reduction in the liquidity of fixed income markets. We assess this claim in the context of the gilt (U.K. government bond) and gilt repo markets over the period 2010 to 2017. We find that gilt repo liquidity worsened during the period when U.K. leverage ratio policy was introduced, and that gilt liquidity worsened conditional on factors such as funding costs and inventory risk. We also find evidence that gilt repo liquidity has become less resilient. However, evidence from heterogeneity in dealer behavior is inconclusive regarding a causal link between leverage ratio requirements and the reduction in market liquidity.

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  • Bicu-Lieb, Andreea & Chen, Louisa & Elliott, David, 2020. "The leverage ratio and liquidity in the gilt and gilt repo markets," Journal of Financial Markets, Elsevier, vol. 48(C).
    • Handle: RePEc:eee:finmar:v:48:y:2020:i:c:s1386418118302039
    DOI: 10.1016/j.finmar.2019.100510
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    Cited by:

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    3. Darrell Duffie & Michael J. Fleming & Frank M. Keane & Claire Nelson & Or Shachar & Peter Van Tassel, 2023. "Dealer Capacity and U.S. Treasury Market Functionality," Staff Reports 1070, Federal Reserve Bank of New York.
    4. Hüser, Anne-Caroline & Lepore, Caterina & Veraart, Luitgard Anna Maria, 2024. "How does the repo market behave under stress? Evidence from the COVID-19 crisis," Journal of Financial Stability, Elsevier, vol. 70(C).
    5. repec:srk:srkwps:20240 is not listed on IDEAS
    6. Boudiaf, Ismael Alexander & Scheicher, Martin & Frieden, Immo, 2024. "The market liquidity of interest rate swaps," ESRB Working Paper Series 147, European Systemic Risk Board.
    7. Coen, Jamie & Coen, Patrick & Hüser, Anne-Caroline, 2024. "Collateral demand in wholesale funding markets," Bank of England working papers 1082, Bank of England.
    8. Gerba, Eddie & Katsoulis, Petros, 2021. "The repo market under Basel III," Bank of England working papers 954, Bank of England.
    9. Hüser, Anne-Caroline & Lepore, Caterina & Veraart, Luitgard, 2021. "How does the repo market behave under stress? Evidence from the Covid-19 crisis," Bank of England working papers 910, Bank of England, revised 18 Jun 2021.
    10. Jurkatis, Simon, 2022. "Inferring trade directions in fast markets," Journal of Financial Markets, Elsevier, vol. 58(C).
    11. Christensen, Jens H.E. & Gillan, James M., 2022. "Does quantitative easing affect market liquidity?," Journal of Banking & Finance, Elsevier, vol. 134(C).
    12. Fatouh, Mahmoud & Giansante, Simone & Ongena, Steven, 2023. "Leverage ratio and risk-taking: theory and practice," Bank of England working papers 1048, Bank of England.
    13. Hüser, Anne-Caroline & Lepore, Caterina & Veraart, Luitgard A. M., 2024. "How does the repo market behave under stress? Evidence from the COVID-19 crisis," LSE Research Online Documents on Economics 121347, London School of Economics and Political Science, LSE Library.
    14. Cristina Di Luigi & Antonio Perrella & Alessio Ruggieri, 2024. "The fundamental role of the repo market and central clearing," Mercati, infrastrutture, sistemi di pagamento (Markets, Infrastructures, Payment Systems) 48, Bank of Italy, Directorate General for Markets and Payment System.
    15. Neamtu, Ioana & Vo, Quynh-Anh, 2021. "Capital allocation, the leverage ratio requirement," Bank of England working papers 956, Bank of England.

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    More about this item

    Keywords

    Market liquidity; Leverage ratio; Bank regulation; Repo; Gilt market; Market-making;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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