However, the Basel III risk-based capital rules allow banks and bank holding companies to use internal models to compute this capital charge for repo lending, and the resulting numbers are typically very small – for all practical purposes, close to zero – for overcollateralized lending transactions, with repo being the canonical example.
I’m not arguing that the very low risk-based charges on repo lending in Basel III are “wrong” in any microprudential sense. After all, they are designed to solve a different problem – that of ensuring bank solvency.