Liquidity Regulation and Financial Intermediaries

53 Pages Posted: 29 May 2018 Last revised: 19 Apr 2019

See all articles by Marco Macchiavelli

Marco Macchiavelli

Board of Governors of the Federal Reserve System

Luke Pettit

Federal Reserve Board of Governors

Multiple version iconThere are 2 versions of this paper

Date Written: April 17, 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 (April 17, 2019). Available at SSRN: https://ssrn.com/abstract=3179800 or http://dx.doi.org/10.2139/ssrn.3179800

Marco Macchiavelli (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Luke Pettit

Federal Reserve Board of Governors ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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