A new report by the Office of Financial Research says that a number of non-US banks are engaging in window dressing at the end of each quarter in US markets in order to make their institutions appear less leveraged and healthier than they really are.
The seasonal sell-off is described as a form of window dressing
The paper, titled “Regulatory Arbitrage in Repo Markets,” notes that near the end of each quarter, an billions of dollars worth of US assets are dumped by non-US banks through the use of repo deals. “Non-U.S. banks with relatively low capital ratios,” the authors of the report point out “appear to temporarily remove an average of $170 billion from the U.S. market for tri-party repurchase agreements (repo) before each quarter-end in order to appear safer and less levered.”
The seasonal sell-off is described as a form of window dressing. As Greg Feldberg, acting deputy director for research and analysis at the Office of Financial Research notes, the temporary sell-offs allows foreign firms to “reduce the size of their balance sheets at quarter end to reduce their capital requirements in particular, to comply with the leverage ratio.” Assets are temporarily sold near the end of the quarter in order to allow the bank to appear to need less capital reserves, with the intention of their repurchase once the new quarter rolls around.
While no individual bank was named in the report, Deutsche Bank, Credit Suisse and Barclays are among the three largest foreign banks in the US repo markets. The repo window dressing practice is said to be similar to the Repo 105 scheme used by Lehman Brothers, in an attempt to cook their balance sheets, in the lead up to their collapse in 2008.
