Support the Wall Street Examiner! Choose your level of support to receive a free proprietary report as my thanks. Click the button below to see your options. Become a Patron!

The Leverage Ratio regulation will hurt liquidity, introduce risks – Sober Look

This is a syndicated repost courtesy of Sober Look. To view original, click here. Reposted with permission.

New bank regulation focused on the so-called Leverage Ratio is expected to do major damage to the US repo market. The measure is a blunt tool that does not permit any netting. That means if a client has a repo trade with a bank and an offsetting (reverse repo) transaction, the two can not be offset. Furthermore, the Leverage Ratio will show double the exposure by grossing up the transactions.

According to JPMorgan, this inability to offset positions will result in some $180bn of new capital requirements for major banks.

JPMorgan: – The inability of banks to offset repos against reverse repos could increase the denominator of the Leverage Ratio by up to $6tr. Applying the 3% minimum capital requirement to this $6tr potentially results in additional capital of $180bn across G4 banks.

That is expected to shrink the market considerably. And lower repo balances will reduce trading and liquidity in the underlying securities – the two markets are closely tied.

Source: JPMorgan


Some 80-90% of repo trades are collateralized with government securities, which will see declines in liquidity as the new rule goes into effect.

This Week Will Tell If The Bear is Really Coming Out of Hibernation

Last week’s selloff did less damage than it may have felt like. The drop stopped in the area of 3 crossing uptrend lines, ranging in length from short term to long term. Here’s what would tell us whether the uptrend is still in force, or signal that something evil this way comes. I have added 8 new stocks to the swing trade chart pick list, including 2 shorts.

In 2008 financial institutions faced a major liquidity crisis that was in large part the result of short-term financing of highly illiquid securities. In order to address these problems, the regulators are now attacking the most liquid part of the market – the exact opposite of where they should be focusing. Ironically these new rules may actually introduce additional risks into the financial system by cutting trading volumes and reducing secured lending against government bonds, both of which are essential in a liquidity crisis.

From our sponsor:

Wall Street Examiner Disclosure: Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. No endorsement of such content is either expressed or implied by posting the content. All items published here are matters of information and opinion, and are neither intended as, nor should you construe it as, individual investment advice. Do your own due diligence when considering the offerings of information providers, or considering any investment.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.