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Liquidity Regulation and Financial Intermediaries

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  • Macchiavelli, Marco
  • Pettit, Luke

Abstract

The liquidity-coverage ratio (LCR) requires banks to hold enough liquidity to withstand a 30-day run. We study the effects of the LCR on broker-dealers, the financial intermediaries at the epicenter of the 2007–2009 crisis. The LCR brings some financial-stability benefits, including a significant maturity extension of triparty repos backed by lower-quality collateral, as well as the accumulation of larger liquidity pools. However, it also leads to less liquidity transformation by broker-dealers. We also discuss the liquidity risks not addressed by the LCR. Finally, we show that a major source of fire-sale risk was self-corrected before the introduction of postcrisis regulations.

Suggested Citation

  • Macchiavelli, Marco & Pettit, Luke, 2021. "Liquidity Regulation and Financial Intermediaries," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(6), pages 2237-2271, September.
    • Handle: RePEc:cup:jfinqa:v:56:y:2021:i:6:p:2237-2271_12
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    Cited by:

    1. Matthew McCormick & Mark E. Paddrik & Carlos Ramírez, 2021. "The Dynamics of the U.S. Overnight Triparty Repo Market," FEDS Notes 2021-08-02, Board of Governors of the Federal Reserve System (U.S.).
    2. Justus Inhoffen & Iman van Lelyveld, 2023. "Safe Asset Scarcity and Re-use in the European Repo Market," Discussion Papers of DIW Berlin 2050, DIW Berlin, German Institute for Economic Research.
    3. Erten, Irem & Neamtu, Ioana & Thanassoulis, John, 2023. "The ring-fencing bonus," Bank of England working papers 999, Bank of England.
    4. Justus Inhoffen & Iman van Lelyveld, 2023. "Safe Asset Scarcity and Re-use in the European Repo Market," Working Papers 787, DNB.

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