Recently the Liberty Street Economics blog on the Federal Reserve Bank of New York’s website published a post entitled: “Regulatory Incentives and Quarter-End Dynamics in the Repo Market.” The post explores the quarter-end repo dynamics of the U.S. repo market for U.S. Treasury securities and primarily focuses on the impact that the leverage ratio has on quarter end dynamics.
Their evaluation of the U.S. tri-party repo market shows that European banks reduce their repo demand at quarter-end while little change is seen from banks in other jurisdictions, including Japan and the United States. The post also shows that repo rates generally remain stable at quarter-end which they attribute to the Fed’s overnight reverse repo program soothing out the disruption in supply caused by the European banks by accepting cash that lenders cannot otherwise invest.
The post also shows a decrease by European banks at quarter-end in the GCF repo market with the average lent decreasing from $33 billion, on average, to $0.25 billion, on average. Since everything is netted on the GCF platform the reduction by the European banks at quarter end will affect the balances of US banks at quarter-end on the GCF platform. The post shows that GCF borrowing rates generally spike at quarter-end.
Accordingly, the post’s data shows that the differing implementation of leverage ratios in Europe, where such ratios are calculated based on a snapshot at quarter end, and the U.S., where ratios are a function of averages of their daily values over the quarter, have consequences on quarter-end repo supply.
The Liberty Street Economics blog post can be found here.
Good Day. DR2