Wells Fargo'​s latest monthly "​Portfolio Manager Commentary" says in a piece entitled, "Developments in the repurchase agreement markets, "​In our August 2013 commentary, we discussed recommendations issued in June for new bank capital ratios and the unfavorable effect they were having on the repurchase agreement (​repo) markets, at least from our vantage point. In an attempt to rein in balance sheet leverage, the Basel Committee on Banking Supervision, a group of global banking authorities, recommended the supplementary leverage ratio, which required banks to hold additional capital on a non-​risk-​adjusted basis. Unlike the Tier 1 risk-​adjusted capital ratio, the total leverage exposure calculation of assets did not give weighting to risk, so all assets received the same weighting.... The June proposal for what was to be included in a bank'​s assets for purposes of calculating the supplementary leverage ratio would have disregarded this accounting convention and presented the asset (​reverse repo) and the liability (​repo) on a gross basis, thus increasing the denominator for the purposes of this calculation. Rather than raise capital against a relatively low-​margin book of business, the banks chose instead to shrink their low margin assets, including repos. This had significant implications for the repo market: After being fairly stable throughout 2012, the repo market shrank from $​2.​7 trillion at the end of 2012 to $​2.​2 trillion a year later, with most of the drop occurring in the last part of 2013, after the announcement of the Basel III recommendations in June. On January 12, 2014, the Basel Committee issued revised recommendations that addressed some of the concerns of market participants, including two changes that might benefit the money markets. Once again, netting of repo and reverse repo transactions will be allowed under certain circumstances, and off-​balance-​sheet items being brought on balance sheet for the purposes of the supplementary leverage ratio calculation may receive different risk weightings. These changes should benefit the lower risk, lower return businesses such as repo and government securities dealing. Not all is golden, however. These are recommendations of the Basel Committee, but U.​S. banking regulators may yet choose to adopt more stringent standards for U.​S. banks. Banking regulators see the availability of cheap wholesale funding as one of the root causes of the recent financial crisis, and repo is at the heart of the wholesale funding market."

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