The European Central Bank published a Working Paper analysing how the regulatory leverage ratio (LR) affects euro area banks’ demand for reserves and the pricing of overnight liquidity in money markets. Using transaction-level data, the authors find a statistically significant link between a bank’s LR and the spread between its overnight borrowing rate and the Eurosystem deposit facility rate (DFR) in unsecured markets and secured over-the-counter (OTC) trades, while the relationship is weaker for CCP-cleared transactions. The study uses Money Market Statistical Reporting (MMSR) data from January 2017 to February 2023 across unsecured overnight trades and secured trades split between OTC and CCP-cleared segments. A one standard deviation increase in a bank’s LR is associated with around a 0.9–1.1 basis point reduction in the (negative) spread to the DFR in the unsecured and secured OTC segments, with stronger effects for banks operating close to the 3% minimum requirement and for global systemically important banks (G‑SIBs) facing an LR add-on. The impact is dampened during the period when central bank reserves were temporarily excluded from the LR exposure measure, and is weaker for CCP-cleared transactions, which the authors link to netting treatment that lowers the Tier 1 capital needed to support gross exposures. The paper notes that these mechanisms can contribute to reporting-date dynamics in rates and spreads, with potential implications for monetary transmission, and does not represent the European Central Bank’s views.
European Central Bank 2025-02-03
European Central Bank working paper finds leverage ratio constraints influence banks’ euro area overnight money market borrowing costs
The European Central Bank's Working Paper examines the impact of the regulatory leverage ratio (LR) on euro area banks' reserve demand and overnight liquidity pricing. The study finds a significant link between a bank's LR and the spread between its overnight borrowing rate and the Eurosystem deposit facility rate in unsecured and OTC trades, with a weaker relationship for CCP-cleared transactions. The findings suggest implications for monetary transmission, especially for banks near the 3% LR requirement and global systemically important banks.