Basel III is the global standard for bank regulation, but each country implements it in slightly different ways. Previous posts showed how the SLR and LCR create constraints that impact short-term rates, but different methods of implementing those regulations also affect markets. European banks calculate their leverage ratio in a way that has made their balance sheets significantly more elastic between quarter-end dates. This difference was a key driver of quarter-end dynamics in recent years. But that elasticity is going away in the coming months even as forever QE continues to fill bank balance sheet with reserves. In this post we recap the recent TGA deluge, review how European banks calculate their leverage ratio, and show why the impending end to this loophole will force much higher ON RRP participation.

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