Finance and Economics Discussion Series (FEDS)

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December 2018

Liquidity Regulation and Financial Intermediaries

Marco Macchiavelli and Luke Pettit

Abstract:

We document several effects of the Liquidity Coverage Ratio (LCR) rule on dealers' financing and intermediation of securities. For identification, we exploit the fact that the US implementation is more stringent than that in foreign jurisdictions. In line with LCR incentives, US dealers reduce their reliance on repos as a way to finance inventories of high-quality assets and increase the maturity of lower-quality repos relative to foreign dealers; additionally, US dealers cut back on trades that downgrade their own collateral. Dealers are nevertheless still providing significant maturity transformation. We also show that significant de-risking occurs immediately after the 2007-09 crisis, before post-crisis regulations.
Accessible materials (.zip)

Keywords: Basel III, Broker-dealers, Liquidity coverage ratio, Repurchase agreements

DOI: https://doi.org/10.17016/FEDS.2018.084

PDF: Full Paper

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Last Update: January 09, 2020