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Internal Liquidity’s Value in a Financial Crisis

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Abstract

A classic question for U.S. financial firms is whether to organize themselves as entities that are affiliated with a bank-holding company (BHC). This affiliation brings benefits, such as access to liquidity from other affiliated entities, as well as costs, particularly a larger regulatory burden. This post highlights the results from a recent Staff Report that sheds light on this tradeoff. This work uses confidential data on the population of broker-dealers to study the benefits of being affiliated with a BHC, with a focus on the global financial crisis (GFC). The analysis reveals that affiliation with a BHC makes broker-dealers more resilient to the aggregate liquidity shocks that prevailed during the GFC. This results in these broker-dealers being more willing to hold riskier securities on their balance sheet relative to broker-dealers that are not affiliated with a BHC.

Suggested Citation

  • Cecilia R. Caglio & Adam Copeland, 2024. "Internal Liquidity’s Value in a Financial Crisis," Liberty Street Economics 20240408, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:98032
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    File URL: https://libertystreeteconomics.newyorkfed.org/2024/04/internal-liquiditys-value-in-a-financial-crisis/
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    More about this item

    Keywords

    broker-dealers; shadow banking; liquidity risk; repo market;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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