Currency Mispricing and Dealer Balance Sheets
After holding for decades, covered interest parity (CIP) has begun to break down over the last few years, indicating arbitrage opportunities. Using contract-level data on foreign exchange derivatives, this paper studies the effect of the leverage ratio on deviations from CIP. The authors find that dealers facing higher leverage ratio requirements demand a premium for synthetic dollar funding over direct dollar funding, causing CIP deviations.
Assessing the Impact of the Basel III Leverage Ratio on the Competitive Landscape of US Derivatives Markets: Evidence from Options
Using daily data on the positions of clearing members in the S&P 500 E-mini futures options market, this paper studies the impact of the Basel III leverage ratio on the competitive landscape of client clearing services. The authors find that after January 2015, when G-SIBs were first required to disclose their leverage ratios, market share of clearing intermediation shifted from banks subject to a high-leverage ratio requirement to banks subject to a lower requirement. As a result, the clearing of E-mini future options shifted from U.S. to E.U. banks.
How does the interaction of macroprudential and monetary policies affect cross-border bank lending?
This paper studies the interaction of monetary and macroprudential policy. Using data on cross-border lending, monetary policy in major international currency issuers, and macroprudential policy in lending home countries, the authors find a statistically and economically significant interaction effect between monetary and macroprudential policies. When monetary policy tightens or eases, a relaxation of macroprudential policy amplifies the impact of monetary policy on lending while a tightening of macroprudential policy has the opposite effect.
Read More: https://www.bis.org/publ/work782.pdf
Is There Too Much Business Debt?
This post investigates the post-crisis growth of corporate debt. Using both aggregate and firm-level data, the authors find that the ratio of corporate debt to GDP is at a 50-year high, but corporate profits have increased recently as well. This increased cash flow mitigates some of the risks of growing debt.