No. 551 - Repo market and leverage ratio in the euro area

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by Luca Baldo, Filippo Pasqualone and Antonio ScaliaMarch 2020

The repo market is a fundamental channel for the transmission of monetary policy in the euro area. Quarter-end spikes in repo rates and in the trading volume, which have been observed in recent years, may hamper the pass-through efficiency of monetary policy. These spikes have often been linked to the Basel 3 leverage ratio (LR) disclosure requirement, which is reported at quarter-end. This paper investigates the effect of the LR on repo market activity in the euro area.

The drop in the repo trading volume and rates at quarter-end has lessened in recent years. Other measures that compensate the balance sheet cost induced by the LR do not increase at quarter-end and do not seem to depend on the LR level. This evidence lessens the concern that the additional LR reporting and disclosure requirements laid down for large banks, which are based on daily averages over the reporting period starting in June 2021, might hinder repo market activity.

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