The Bank for International Settlements ("BIS") published a Report that found that changes in the availability and cost of repurchase agreement ("repo") financing are affecting the ability of repo markets to support the financial system. The Report was prepared by a study group organized by the BIS Committee on the Global Financial System ("CGFS") that included staff members from international regulatory agencies, the Board of Governors of the Federal Reserve System and the New York Fed.
The study group examined repo transactions backed by government bonds and concluded that banks in some jurisdictions appear to be less willing to undertake repo market intermediation than they were before the crisis. Key "drivers" behind these changes include "exceptionally accommodative monetary policy" and regulatory changes that have made intermediation more costly. However, the study group cautioned that it would be premature to establish correlations between policy changes and changes in the market given "differences in repo markets across jurisdictions and the fact that repo markets are in a state of transition."
To improve repo market functioning, the study group recommended that a series of temporary measures be implemented, including steps to reduce the "scarcity of certain collateral."
Commentary
It seems regulators are beginning to acknowledge that new regulations may have had some negative effects on the financial markets, financial market participants, investors and the economy. See, e.g., Federal Reserve Governor Daniel Tarullo Reconsiders the Volcker Rule; Comptroller Reviews Regulatory Environment for Community Banks and Mutual Associations. This is a welcome development. It is the start of a conversation about the fact that some rules do more harm than good and that not every examination of a rule has to be a partisan or political event.
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