Liquidity Regulation and Financial Intermediaries

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