Effect of SLR on Repo Volume when Capital is Adjustable Sample Clauses

Effect of SLR on Repo Volume when Capital is Adjustable. A bank can set its capacity to intermediate repo by allocating more or less capital to its BD. This can be accomplished by raising or repaying capital or by re-allocating internal capital to the BD. We analyze the bank’s choice of capital during a period of sufficient length for the bank to re-set its entire capital allocation. Equation 2 implies that the incremental amount of capital required per unit of repo volume is L ∆equity/∆repo volume = 2L. Let c denote the unit cost of capital. We evaluate the decision problem of a BD who enters into a repo transaction with MM while it is at the SLR lower bound by including a marginal cost of repo 2cL when repo volume exceeds the initial SLR threshold amount D = 1 equity − assets. The BD’s problem is to set the repo rate rMM it offers to MM to maximize its profit, given the MM ’s demand function for repo volume in units of T , DrMM , and the inter-dealer repo rate rinter-dealer (which we take to be market determined and exogenous) at which it is able to offset its transaction with MM by entering into a reverse-repo transactions with another BD. Equation 3 describes the BD’s decision problem. argmax (rInter-dealer − rMM )DrMM − 1{DrMM > D}2cLDrMM
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