Bank-Intermediated Arbitrage

77 Pages Posted: 28 Jul 2020 Last revised: 16 Aug 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 2020

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, diversify away from G-SIB 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.

Suggested Citation

Boyarchenko, Nina and Eisenbach, Thomas M. and Gupta, Pooja and Shachar, Or and Van Tassel, Peter, Bank-Intermediated Arbitrage (July 2020). CEPR Discussion Paper No. DP15097, Available at SSRN: https://ssrn.com/abstract=3661441

Nina Boyarchenko (Contact Author)

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Thomas M. Eisenbach

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Pooja Gupta

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

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Or Shachar

Federal Reserve Bank of New York ( email )

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(212) 720-1582 (Fax)

Peter Van Tassel

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

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New York, NY 10045
United States

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