Banks warn new rules threaten "repo" market Big US banks are warning that new rules on their funding risk damaging the more-than-$7tn "repo market," where financial institutions borrow against government bonds, potentially destabilising one of the most important financial markets in the world. Analysts at JPMorgan Chase estimate that big banks in Europe, Japan and the US would have to hold at least $180bn of additional regulatory capital to cover their borrowings in the repo market under new leverage ratio rules proposed by US and international banking regulators in recent weeks. The market helps fund trillions of dollars worth of securities and financial transactions every day, but it has also come under regulatory scrutiny after a pullback in repo financing helped spur Lehman Brothers" collapse in 2008. "A [further] retrenchment in repo markets seems inevitable following these rules," JPMorgan analysts led by Nikolaos Panigirtzoglou said in research published late last week. This is unwelcome news for the liquidity of the underlying securities. The leverage ratios proposed by US and international banking regulators require banks to hold a certain level of extra capital against all of their assets, in an effort to cap the financial industry's borrowing levels in a simpler and blunter way. The ratio proposed by the Basel Committee does not allow banks to "net," or offset, their various repo trades against one another - making the borrowing more expensive for banks. A similar rule laid out by US regulators earlier this month did not explicitly forbid netting of repos, but referred to the rules proposed by Basel. The warnings come as banks prepare to lobby against parts of the new US leverage ratio proposed by local regulators including the Federal Reserve. Executives at two large US banks said that the Treasury department was likely to weigh in on the new leverage rule since it could affect US government debt. The vast majority of repo transactions use government bonds as collateral. What they're trying to do with the leverage ratio is to simplify. But I think financing markets in particular will be pretty hard hit under the current framework," said one repo expert at a large US bank. Where you could have a real effect is in the higher quality assets like US Treasuries and agency debt. As [the proposed rule is] written today we would definitely have to deleverage our financing business. A retrenchment in repo would make it the latest bank business to be transformed by new financial rules. Higher capital requirements have already affected banks" ability to hold corporate bonds, said Brad Hintz, an analyst at AllianceBernstein and a former chief financial officer at Lehman. Big banks" inventories of corporate bonds have sunk from a 2007 peak of $235bn to $54bn now, partly in response to new rules. "The new leverage rule is going to hit the repo business, securities lending and government bonds, plus any derivatives that are left behind," Mr Hintz said. But many bank executives have also said they expect the final rule in the US to differ from the one initially proposed. Banks have already begun warning that some aspects of the new rule could affect the wider economy, for example limiting "unfunded credit commitments" which they offer to customers.