75 Pages Posted: 20 Jun 2018 Last revised: 29 Jul 2020
Date Written: July 1, 2018
We argue that post-crisis banking regulations pass through from regulated institutions to unregulated arbitrageurs. We document that, once post-crisis regulations bind post 2014, hedge funds use a larger number of prime brokers and diversify away from GSIB-affiliated prime brokers, and that the match to such prime brokers is more fragile. Tighter regulatory constraints disincentivize regulated institutions not only to engage in arbitrage activity themselves but also to provide leverage to other arbitrageurs. Indeed, we show that the maximum leverage allowed and the implied return on basis trades is considerably lower under post-crisis regulation, in spite of persistently wider spreads.
Keywords: cost of capital, beta, bank regulation, Dodd-Frank act, banks
JEL Classification: G01, G21, G23, G28
Suggested Citation: Suggested Citation