Liquidity Regulation and Financial Intermediaries

47 Pages Posted: 10 Dec 2018 Last revised: 21 Feb 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: 2018-12-06

Abstract

We document several effects of the Liquidity Coverage Ratio (LCR) rule on dealers' financing and intermediation of securities. For identification, we exploit the fact that the US implementation is more stringent than that in foreign jurisdictions. In line with LCR incentives, US dealers reduce their reliance on repos as a way to finance inventories of high-quality assets and increase the maturity of lower-quality repos relative to foreign dealers; additionally, US dealers cut back on trades that downgrade their own collateral. Dealers are nevertheless still providing significant maturity transformation. We also show that significant de-risking occurs immediately after the 2007-09 crisis, before post-crisis regulations.

Keywords: Basel III, Broker-dealers, Liquidity coverage ratio, Repurchase agreements

JEL Classification: G28, E58, G24

Suggested Citation

Macchiavelli, Marco and Pettit, Luke, Liquidity Regulation and Financial Intermediaries (2018-12-06). FEDS Working Paper No. 2018-084. Available at SSRN: https://ssrn.com/abstract=3298800 or http://dx.doi.org/10.17016/FEDS.2018.084

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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