Menu Close

The regulatory war on repo will have unintended consequences- Sober Look

In addition to the pending Basel-based regulation on minimum leverage ratio (see post), US regulators are pushing to set the minimum supplementary Tier 1 leverage ratio for the eight “systemically important” US banks to 5%. Once again, this is expected to hit the repo market as well as other assets with low risk weights.

This action will achieve the following:In addition to the pending Basel-based regulation on minimum leverage ratio (
Source: Barclays Research

1. Disrupt the functioning of money markets by pushing larger banks out of secured deposits. Deposits collateralized by treasuries (reverse repo) is the only way many institutional palyers can place cash with banks without taking unsecured bank risk. Now these institutions will be forced take bank risk or buy treasury bills – which will likely go negative as a result.

2. Reduce liquidity in the treasury markets. As discussed earlier, treasury trading volumes follow repo volumes – and this is not a great outcome for either.

3. Increase fails and the overall volatility of the treasury markets by making it harder to borrow treasuries.

Barclays Research: – A significant reduction in repo could reduce the ability of dealers to short securities without risk of being able to deliver, raising the prospect of the fails charge being triggered. This should factor into how aggressive they are at auction and actual auction pricing. Further, the possibility of increased fails could mean greater volatility in rates around Treasury auctions.

4. Create similar headwinds as in #2 and #3 above in the MBS markets and potentially other markets that involve some form of securities lending.

Barclays Research: – Full effects likely to be more widespread. We believe the knock-on effects of these rule changes are not likely to be limited to the Treasury and MBS markets. They would likely filter through to other markets, including credit and equities, potentially reducing liquidity and increasing volatility over time.

This regulation will certainly not reduce the risk of a systemic problem going forward – in fact it is likely to have the opposite effect. Banks will find other ways to make money, potentially by shifting to riskier assets. Ultimately it will be the end-users and market participants (mutual funds, ETFs, pensions, securities custodians, insurance firms, endowments, foundations, retail investors, etc.) who will feel the brunt of this regulation. Welcome to the world of “unintended consequences”.

5 percent minimum for U.S. systemically important banks
var docstoc_docid=”160225520″;var docstoc_title=”5 percent minimum tier 1″;var docstoc_urltitle=”5 percent minimum tier 1″;

SoberLook.com

From our sponsor:

Syndicated repost courtesy of :

    

Join the conversation and have a little fun at Capitalstool.com. If you are a new visitor to the Stool, please register and join in! To post your observations and charts, and snide, but good-natured, comments, click here to register. Be sure to respond to the confirmation email which is sent instantly. If not in your inbox, check your spam filter.

Leave a Comment

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

RSS
Follow by Email
LinkedIn
Share

Discover more from The Wall Street Examiner

Subscribe now to keep reading and get access to the full archive.

Continue reading