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Liquidity Regulation and Financial Intermediaries

Published online by Cambridge University Press:  17 August 2020

Marco Macchiavelli Open the ORCID record for Marco Macchiavelli [Opens in a new window]  and
Luke Pettit
Marco Macchiavelli*
Affiliation:
Federal Reserve Board
Luke Pettit
Affiliation:
Federal Reserve Board [email protected]
*
[email protected] (corresponding author)
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Abstract

The liquidity-coverage ratio (LCR) requires banks to hold enough liquidity to withstand a 30-day run. We study the effects of the LCR on broker-dealers, the financial intermediaries at the epicenter of the 2007–2009 crisis. The LCR brings some financial-stability benefits, including a significant maturity extension of triparty repos backed by lower-quality collateral, as well as the accumulation of larger liquidity pools. However, it also leads to less liquidity transformation by broker-dealers. We also discuss the liquidity risks not addressed by the LCR. Finally, we show that a major source of fire-sale risk was self-corrected before the introduction of postcrisis regulations.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 6 , September 2021 , pp. 2237 - 2271
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We are grateful to Laurence Ball for useful discussions. For their comments, we thank Hendrik Bessembinder (the editor), Lamont Black (discussant), Darrell Duffie, Edith Hotchkiss (the referee), Ivan Ivanov, Gabriele La Spada (discussant), Hong-Jen Lin (discussant), Patrick McCabe, and Kumar Venkataraman and participants at the Federal Reserve Board, the 2019 Federal Deposit Insurance Corporation (FDIC) 19th Annual Bank Research Conference, the 2019 Financial Management Association (FMA) Applied Finance Conference, the 2019 Midwest Finance Association (MFA) Meeting, and the 2018 New York Federal Reserve–Bank of Italy Post Crisis Financial Regulation Conference. The views expressed in this article are those of the authors and do not necessarily reflect those of the Board of Governors or the Federal Reserve System.

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