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Bank balance sheet constraints and bond liquidity

Author

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  • Breckenfelder, Johannes
  • Ivashina, Victoria

Abstract

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. JEL Classification: G12, G18, G21

Suggested Citation

  • Breckenfelder, Johannes & Ivashina, Victoria, 2021. "Bank balance sheet constraints and bond liquidity," Working Paper Series 2589, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20212589
    Note: 1125999
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2589~2fda18e5ca.en.pdf
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    References listed on IDEAS

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    Cited by:

    1. Shida, Jakob, 2023. "Primary market demand for German government bonds," Journal of International Money and Finance, Elsevier, vol. 137(C).
    2. Hoerova, Marie & Breckenfelder, Johannes, 2023. "Do non-banks need access to the lender of last resort? Evidence from fund runs," CEPR Discussion Papers 18122, C.E.P.R. Discussion Papers.
    3. Simone Letta & Pasquale Mirante, 2023. "Investigating the determinants of corporate bond credit spreads in the euro area," Temi di discussione (Economic working papers) 36, Bank of Italy, Economic Research and International Relations Area.
    4. Jieun Lee, 2023. "Dollar and government bond liquidity: evidence from Korea," BIS Working Papers 1145, Bank for International Settlements.
    5. Martijn Boermans, 2022. "A literature review of securities holdings statistics research and a practitioner’s guide," Working Papers 757, DNB.
    6. Corradin, Stefano & Schwaab, Bernd, 2023. "Euro area sovereign bond risk premia before and during the Covid-19 pandemic," European Economic Review, Elsevier, vol. 153(C).

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    More about this item

    Keywords

    bond liquidity; capital requirements; COVID-19; leverage ratio; market-making; mutual funds;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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