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 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 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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