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With its latest report on the impact of the Liquidity Coverage Ratio the EBA has stated:

"Incentives for regulatory arbitrage could be minimised if central bank operations were treated consistently with other market repos. In particular, the following calibration could be analysed: operations with the central bank up to the bank’s minimum reserve requirements (and autonomous factors) could receive a 0% run-off in cash outflows. Beyond minimum reserve requirements (plus autonomous factors), the run-off rates for repos with the central bank could be treated like all other collateralised operations with other market participants based on the underlying collateral. On the one hand, this could reduce incentives for LCR arbitrage via central bank facilities and help ensuring a level playing field between banks operating in jurisdictions with different monetary environments (neutral liquidity balance, liquidity surplus and liquidity deficit). The US Fed, the OCC, and FDIC propose a run-off rate for all central bank repos that is equal to that for repos with other market participants. On the other hand, if central banks buy Level 2A and Level 2B assets, a non-zero runoff rate of central bank operations beyond minimum reserve requirements could pose a significant disadvantage for banks operating where monetary policy is implemented through repo operations (e.g. Eurosystem) rather than through outright purchases of assets (e.g. US). " -Report on impact assessment for liquidity measures under Article 509(1) of the CRR, p.18

Do you know where and when the US Federal Reserve, OCC or FDIC has made such a statement? The current implementation of the LCR in the United States seems to be “super equivalent” to Basel.

Furthermore, why should the existence of regulatory arbitrage be something to worry about? To my understanding of the issue, banks would use liquid collateralisation with market repos and non-liquid collateralisation with central bank repos.

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