Liquidity, Leverage Regs Pressure The Short-Term Lending Market

Now that post-crisis regulations surrounding capital requirements for risk-weighted assets have mostly been hammered out, rule-making is turning to leverage and liquidity. While it’s still early in the process, a declining repo market could be a sign of tighter short-term lending markets once new regulations are in full effect.

“As banks increase funding durations, shrink low-return assets and re-price certain business to account for less leverage, we expect the ultimate impact to be a smaller, more expensive short-term financing market which may impact overall trading activity,” writes Goldman Sachs analyst Richard Ramsden. “The net impact to bank earnings is harder to determine as pricing improves but the overall size of the market/activity levels...