Non-bank Financial Institutions and the Functioning of Government Bond Markets

BIS Papers no 119

26 Pages Posted: 10 Jan 2022

See all articles by Egemen Eren

Egemen Eren

Bank for International Settlements (BIS) - Monetary and Economic Department

Philip D. Wooldridge

Bank for International Settlements (BIS)

Date Written: November 17, 2021

Abstract

The structure of market making in government bond markets has shifted from a bank-centric model to a hybrid one in which non-bank financial institutions, notably principal trading firms and hedge funds, play an important role alongside banks. This shift has occurred in several countries and, while farthest advanced in liquid segments, is also evident in less liquid segments. The turmoil in March 2020 highlighted structural vulnerabilities arising from the hybrid model and the procyclical behaviour of some non-bank financial institutions. Proposals for improving the resilience of liquidity in government bond markets aim to reduce demand for liquidity during stress episodes, increase intermediation capacity and improve the efficiency of intermediation.

Keywords: financial intermediation, market liquidity, leverage, hedge funds, principal trading firms, government bonds.

JEL Classification: G15, G23, G28

Suggested Citation

Eren, Egemen and Wooldridge, Philip D., Non-bank Financial Institutions and the Functioning of Government Bond Markets (November 17, 2021). BIS Papers no 119, Available at SSRN: https://ssrn.com/abstract=4003002 or http://dx.doi.org/10.2139/ssrn.4003002

Egemen Eren (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Philip D. Wooldridge

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

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