Liquidity Regulation and Financial Intermediaries

51 Pages Posted: 29 May 2018 Last revised: 26 Oct 2023

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2019

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 2008-09 crisis. The LCR brings some financial stability benefits, including a significant maturity extension of triparty repos backed by lower-quality collateral, and 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 post-crisis regulations.

Keywords: Broker-Dealers, Repos, Liquidity Coverage Ratio, Basel III

JEL Classification: G24, G28, E58

Suggested Citation

Macchiavelli, Marco and Pettit, Luke, Liquidity Regulation and Financial Intermediaries (July 1, 2019). Available at SSRN: https://ssrn.com/abstract=3179800 or http://dx.doi.org/10.2139/ssrn.3179800

Marco Macchiavelli (Contact Author)

Isenberg School of Management ( email )

Amherst, MA 01003
United States

Luke Pettit

US Senate

U.S. Senate
Washington, DC 20510
United States

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