Window Dressing of Regulatory Metrics: Evidence from Repo Markets

Abstract

This paper investigates both the magnitude and the drivers of bank window dressing behaviour in euro-denominated repo markets. Using a confidential transaction-level data set, our analysis illustrates that banks engineer an economically sizeable contraction in their repo transactions around regulatory reporting dates. We establish a causal link between these reductions and banks’ incentives to window dress and document the role of the leverage ratio and the G-SIB framework as the most relevant drivers of window dressing behaviour. Our findings suggest that regulatory action is warranted to limit banks’ ability to window dress.

Note: The views expressed in this paper are those of the authors and do not necessarily reflect the views of the European Central Bank, the Eurosystem, or its staff.

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