The main finding of this post is that changes to repo prices were largely driven by changes in supply by repo dealers over the period from 2014 to 2018. A host of factors affect supply, one of which may have been the recent introduction of the leverage ratio, which may have increased dealers’ relative costs of intermediating in repo markets, at least temporarily. The leverage ratio was introduced post-crisis by policymakers to enhance dealers’ resilience and thereby help improve the safety of the financial system. This post does not consider these important benefits of the leverage ratio as part of the analysis. Nor does it identify the relative contribution of different drivers of supply including changes in regulation or banks’ risk appetite.
But our results are consistent with the notion that the introduction of the leverage ratio may have played a role in reducing the willingness of intermediaries to respond to demands for cash. And this effect appears to be stronger for transactions that incur regulatory costs. Our findings suggests that nettable centrally cleared repo transactions may benefit repo market resilience. This could support the case for widening access to central clearing.