The (Unintended?) Consequences of the Leverage Ratio on Repo Market Intermediation

This paper studies the impact of the leverage ratio on dealer-client repo intermediation. We exploit a new and unique transaction level dataset capturing the near-universe of gilt repo trading in combination with a regulatory change in the UK. Studying adjustments within dealer-client pairs, we find that dealer banks subject to a more binding leverage ratio following the regulatory change offered lower rates and reduced repo volume to their smaller clients compared to dealer banks not affected by the change. Larger clients and clients with whom the dealer had a strong lending relationship prior to the change were not affected. The results hold when controlling for demand at the client level and concurrent shocks at the dealer level. Overall, this paper indicates that the leverage ratio can negatively affect repo intermediation for small banks and non-bank financial institutions.