The Value of Internal Sources of Funding Liquidity: U.S. Broker-Dealers and the Financial Crisis

44 Pages Posted: 26 May 2021

See all articles by Cecilia Caglio

Cecilia Caglio

Board of Governors of the Federal Reserve System

Adam M. Copeland

Federal Reserve Banks - Federal Reserve Bank of New York

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

Date Written: May 2021

Abstract

We use confidential and novel data to measure the benefit to broker-dealers of being affiliated with a bank holding company and the resulting access to internal sources of funding. We accomplish this by comparing the balance sheets of broker-dealers that are associated with bank holding companies to those that are not and we find that the latter dramatically re-structured their balance sheets during the 2007-09 financial crisis, pivoting away from trading illiquid assets and toward more liquid government securities. Specifically, we estimate that broker-dealers that are not associated with bank holding companies both increased repo as a share of total assets by 10 percentage points and also increased the share of long inventory devoted to government securities by 15 percentage points, relative to broker-dealers associated with bank holding companies.

Keywords: broker-dealers, shadow banking, liquidity risk, repo market

JEL Classification: G2, G21, G23

Suggested Citation

Caglio, Cecilia and Copeland, Adam M. and Martin, Antoine, The Value of Internal Sources of Funding Liquidity: U.S. Broker-Dealers and the Financial Crisis (May 2021). FRB of New York Staff Report No. 969, Available at SSRN: https://ssrn.com/abstract=3853206 or http://dx.doi.org/10.2139/ssrn.3853206

Cecilia Caglio

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Adam M. Copeland (Contact Author)

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

33 Liberty Street
New York, NY 10045
United States

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6943 (Phone)

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