The Effects of the Volcker Rule on Corporate Bond Trading: Evidence from the Underwriting Exemption

Abstract

Using confidential supervisory data on dealer-identified corporate bond trading, we examine how the Volcker rule affected the provision of liquidity. By exploiting the rule’s underwriting exemption to identify the Volcker rule’s effects separate from other post-crisis changes in regulation and broader trends in market liquidity, we find significant adverse liquidity effects on covered firms’ corporate bond trading, borne by both customers and other dealers trading with the covered firm. We find no reduction in the volatility of covered firms’ trading costs due to the rule, while their market share has decreased. These effects do not appear to be transitional.

Keywords: Banking regulation, Volcker rule, heightened prudential regulation, corporate bonds, market liquidity, regulatory impact analysis

JEL Classification: G28, G21, G23