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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. Fabienne Schneider, 2024. "On-the-run Premia, Settlement Fails, and Central Bank Access," Working Papers 24.05, Swiss National Bank, Study Center Gerzensee.
    2. Mark Paddrik & Carlos Ramirez & Matthew McCormick, 2021. "The Dynamics of the U.S. Overnight Triparty Repo Market," Briefs 21-02, Office of Financial Research, US Department of the Treasury.
    3. Roberts, Daniel & Sarkar, Asani & Shachar, Or, 2023. "Liquidity regulations, bank lending and fire-sale risk," Journal of Banking & Finance, Elsevier, vol. 156(C).
    4. Thanassoulis, John & Erten, Irem & Neamtu, Ioana, 2022. "The Ring-Fencing Bonus," CEPR Discussion Papers 17625, C.E.P.R. Discussion Papers.
    5. Justus Inhoffen & Iman van Lelyveld, 2023. "Safe Asset Scarcity and Re-use in the European Repo Market," Working Papers 787, DNB.
    6. 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.

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