Staff Working Paper No. 956
By Ioana Neamtu and Quynh-Anh Vo
This paper explores the mechanism that makes banks that are not bound by the leverage ratio reduce their repurchase agreement (repo) intermediation. Despite the leverage‑intensive nature of repo activities, it remains unclear why such banks would decrease their repo business. We argue that this behaviour stems from banks’ internal capital allocation practices of applying regulatory requirements at the business‑unit level instead of the consolidated level. To this end, we develop a theoretical model of banks with multiple business units and calibrate it to the UK banking sector. We show that applying regulatory requirements at the business‑unit level leads to a disproportionate reduction in the repo operations among banks that are unconstrained by the leverage ratio. We also find that this impact varies across different bank business models.
This version was updated in December 2025.
Previous version of this Staff Working Paper was available under the title ‘Banks’ internal capital allocation, the leverage ratio requirement and risk-taking’.
Not bound, but still relevant: How does the leverage ratio affect banks’ intermediation?
