Bank-Intermediated Arbitrage

75 Pages Posted: 20 Jun 2018 Last revised: 29 Jul 2020

See all articles by Nina Boyarchenko

Nina Boyarchenko

Federal Reserve Bank of New York

Thomas M. Eisenbach

Federal Reserve Banks - Federal Reserve Bank of New York

Pooja Gupta

Federal Reserve Banks - Federal Reserve Bank of New York

Or Shachar

Federal Reserve Bank of New York

Peter Van Tassel

Federal Reserve Banks - Federal Reserve Bank of New York

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2018

Abstract

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

Boyarchenko, Nina and Eisenbach, Thomas M. and Gupta, Pooja and Shachar, Or and Van Tassel, Peter, Bank-Intermediated Arbitrage (July 1, 2018). FRB of New York Staff Report No. 858, Available at SSRN: https://ssrn.com/abstract=3200041 or http://dx.doi.org/10.2139/ssrn.3200041

Nina Boyarchenko

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
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212-720-1582 (Fax)

Thomas M. Eisenbach (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6089 (Phone)

HOME PAGE: http://teisenbach.github.io/

Pooja Gupta

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Or Shachar

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
(212) 720-6974 (Phone)
(212) 720-1582 (Fax)

Peter Van Tassel

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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