Bank Balance Sheet Constraints and Bond Liquidity

49 Pages Posted: 11 Jun 2021 Last revised: 18 Oct 2021

See all articles by Johannes Breckenfelder

Johannes Breckenfelder

European Central Bank (ECB) - Financial Research

Victoria Ivashina

Harvard University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 31, 2021


We explore the ties between bonds and individual dealers formed through home advantage and the persistence of previous underwriting relationships. Building on these connections, we show that the introduction of the leverage ratio for the European banks had a large impact on exposed bonds’ liquidity. Moreover, based on these ties, we show that bond mutual fund panic following the 2020 pandemic outbreak affected substantially more mutual funds with the larger exposures to dealer banks’ balance sheet constraints.

Keywords: Bond liquidity; market-making; capital requirements; leverage ratio; mutual funds; COVID-19

JEL Classification: G12, G18, G21

Suggested Citation

Breckenfelder, Johannes and Ivashina, Victoria, Bank Balance Sheet Constraints and Bond Liquidity (May 31, 2021). Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: or

Johannes Breckenfelder (Contact Author)

European Central Bank (ECB) - Financial Research ( email )

Sonnemannstrasse 20
D-60314 Frankfurt am Main


Victoria Ivashina

Harvard University ( email )

Harvard Business School
Baker Library 233
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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