The Effects of the Volcker Rule on Corporate Bond Trading: Evidence from the Underwriting Exemption

49 Pages Posted: 22 Aug 2019

See all articles by Meraj Allahrakha

Meraj Allahrakha

International Monetary Fund (IMF) - Statistics Department; George Mason University - Department of Computational Social Science; George Washington University - Department of Economics

Jill Cetina

Federal Reserve Banks - Federal Reserve Bank of Dallas

Benjamin Munyan

Vanderbilt University - Finance

Sumudu W. Watugala

Cornell University - Dyson School of Applied Economics and Management

Date Written: August 6, 2019

Abstract

Using a novel within-dealer, within-security identification strategy, we examine intended and unintended effects of the Volcker rule on covered firms' corporate bond trading using dealer-identified regulatory data. We use the underwriting exemption to isolate the Volcker rule's effects separate from other post-crisis changes in bank regulation and broader trends in market liquidity. We find no evidence of the rule's intended reduction in the riskiness of covered firms' trading in corporate bonds. We find significant adverse liquidity effects on covered firms' corporate bond trading with 20-45 basis points higher costs for customers even for roundtrip trades of shorter duration. These effects do not appear to be transitional. The Volcker rule appears to have increased the cost of the liquidity provided by covered firms and has not decreased the liquidity risk exposure of covered firms. Finally, the Volcker rule has decreased the market share of covered firms. Customers appear to be trading more with non-bank dealers, who are exempt from the Volcker rule but also lack access to emergency liquidity support at the Fed's discount window.

Keywords: Banking regulation, Volcker rule, heightened prudential regulation, corporate bonds, market liquidity, regulatory impact analysis

JEL Classification: G28, G21, G23

Suggested Citation

Allahrakha, Meraj and Cetina, Jill and Munyan, Benjamin K. and Watugala, Sumudu W., The Effects of the Volcker Rule on Corporate Bond Trading: Evidence from the Underwriting Exemption (August 6, 2019). OFR 19-02. Available at SSRN: https://ssrn.com/abstract=3440712 or http://dx.doi.org/10.2139/ssrn.3440712

Meraj Allahrakha (Contact Author)

International Monetary Fund (IMF) - Statistics Department ( email )

Washington, DC
United States

George Mason University - Department of Computational Social Science

4400 University Drive
Research I, CSC Suite, Level 3
Fairfax, VA 22030
United States

George Washington University - Department of Economics

Monroe Hall, Suite 340
2115 G Street, NW
Washington, DC 20052
United States

Jill Cetina

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Benjamin K. Munyan

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Sumudu W. Watugala

Cornell University - Dyson School of Applied Economics and Management ( email )

Ithaca, NY
United States

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