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187 posts on "Financial Markets"

September 06, 2017

What Drives International Bank Credit?



LSE_2017_What Drives International Bank Credit?

A major question facing policymakers is how to deal with slumps in bank credit. The policy prescriptions are very different depending on whether the decline is a result of global forces, domestic demand, or supply problems in a particular banking system. We present findings from new research that exactly decompose the growth in banks’ aggregate foreign credit into these three factors. Using global banking data for the period 2000-16, we uncover some striking patterns in bilateral credit relationships between consolidated banking systems and borrowers in more than 200 countries. The most important we term the “Anna Karenina Principle” of global banking: all healthy credit relationships behave alike; each unhealthy credit relationship is unhealthy in its own way.

Continue reading "What Drives International Bank Credit?" »

August 09, 2017

Investor Diversity and Liquidity in the Secondary Loan Market



LSE_Investor Diversity and Liquidity in the Secondary Loan Market

Over the last two decades, the U.S. secondary loan market has evolved from a relatively sleepy market dominated by banks and insurance companies that trade only occasionally to a more active market comprising a diversified set of institutional investors, including collateralized loan obligations (CLOs), loan mutual funds, hedge funds, pension funds, brokers, and private equity firms. This shift resulted from the growing presence of these investors in the syndicates of corporate loans, as shown in the chart below. In 1991 the average term loan had just two different types of investors; by 2013 that number had grown to five.

Continue reading "Investor Diversity and Liquidity in the Secondary Loan Market" »

Posted by Blog Author at 7:00 AM in Banks, Financial Markets | Permalink | Comments (0)

August 07, 2017

Regulatory Incentives and Quarter-End Dynamics in the Repo Market



LSE_Regulatory Incentives and Quarter-End Dynamics in the Repo Market

Since the global financial crisis, central bankers and other prudential authorities have been working to design and implement new banking regulations, known as Basel III, to reduce risk in the financial sector. Although most features of the Basel III regime are implemented consistently across jurisdictions, some important details vary. In particular, banks headquartered in the euro area, Switzerland, and Japan report their leverage ratios—essentially, capital divided by total consolidated assets—as a snapshot of their value on the last day of the quarter. In contrast, institutions headquartered in the United States and the United Kingdom report most leverage ratio components as averages of their daily values over the quarter. In this post, we study the impact of this difference in regulatory implementation on rates and quantities borrowed in the U.S. repo market.

Continue reading "Regulatory Incentives and Quarter-End Dynamics in the Repo Market" »

Posted by Blog Author at 7:00 AM in Banks, Financial Markets, Repo | Permalink | Comments (2)

June 28, 2017

Market Liquidity after the Financial Crisis



LSE_Market Liquidity after the Financial Crisis

The possible adverse effects of regulation on market liquidity in the post-crisis period continue to garner significant attention. In a recent paper, we update and unify much of our earlier work on the subject, following up on three series of earlier Liberty Street Economics posts in August 2015, October 2015, and February 2016. We find that dealer balance sheets have continued to stagnate and that various measures point to less abundant funding liquidity. Nonetheless, we do not find clear evidence of a widespread deterioration in market liquidity.

Continue reading "Market Liquidity after the Financial Crisis" »

Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments (3)

June 19, 2017

Introducing the Revised Broad Treasuries Financing Rate



LSE_Introducing the Revised Broad Treasuries Financing Rate

The Federal Reserve Bank of New York, in cooperation with the Office of Financial Research, is proposing to publish three new overnight Treasury repurchase (repo) benchmark rates. Recently, the Federal Reserve decided to modify the construction of the broadest proposed benchmark rate (the other two proposed rates are expected to remain unchanged; see the Bank’s announcement on May 24). In this post, we describe the changes to this rate in further detail. We compare this revised rate to the originally proposed benchmark rate and show that, in the post-liftoff period, it trades higher, on average.

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Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments (2)

May 24, 2017

Dealer Balance Sheets and Corporate Bond Liquidity Provision



Dealer Balance Sheets and Corporate Bond Liquidity Provision

Regulatory reforms since the financial crisis have sought to make the financial system safer and severe financial crises less likely. But by limiting the ability of regulated institutions to increase their balance sheet size, reforms—such as the Dodd-Frank Act in the United States and the Basel Committee's Basel III bank regulations internationally—might reduce the total intermediation capacity of the financial system during normal times. Decreases in intermediation capacity may then lead to decreased liquidity in markets in which the regulated institutions intermediate significant trading activity. While recent commentary by market participants claims that this is indeed the case—Wall Street Journal article [subscription required] notes that “three-quarters of institutional bond investors say that liquidity provided by bond dealers has declined in the past year...”—empirical studies have struggled to find evidence supporting this narrative. In this post, we summarize the findings of our recent article in the Journal of Monetary Economics that addresses the apparent disconnect between the market-participant commentary and the empirical evidence by focusing on the relationship between bond-level liquidity and financial institutions’ balance sheet constraints.

Continue reading "Dealer Balance Sheets and Corporate Bond Liquidity Provision" »

Posted by Blog Author at 7:00 AM in Dealers, Financial Institutions, Financial Markets | Permalink | Comments (0)

May 12, 2017

At the N.Y. Fed: The Evolution of OTC Derivatives Markets



LSE_2017_evolution-of-otc_boyarchenko_460_art

The 2007-09 financial crisis highlighted weaknesses in the over‑the‑counter (OTC) derivatives markets and the increased risk of contagion due to the interconnectedness of market participants in these markets. As a response, the global regulatory community introduced a number of reforms to both the market structure and the regulatory environment. The intent of these innovations was to improve the functioning of OTC markets but some market participants have suggested that some of the new regulations may have had unintended consequences. In this post, we discuss some key takeaways from a recent two-day conference on “Over‑the‑Counter Derivatives and Recent Regulatory Changes,” where policymakers, academics, practitioners, and other experts convened to discuss the evolution of OTC derivatives markets after the crisis.

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January 18, 2017

Advent of Trade Reporting for U.S. Treasury Securities



Greater transparency is coming to the U.S. Treasury securities market. Members of the Financial Industry Regulatory Authority (FINRA) will be required to report their trades in Treasuries using FINRA’s Trade Reporting and Compliance Engine (TRACE) starting July 10, 2017. Although initial collection efforts are focused on providing such data to the official sector, the public will likely have access in the future. In this post, I discuss the motivation for such reporting, how it came to be decided on, and the evidence from the corporate bond market on how public access to such data affects trading costs.

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Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments (0)

January 11, 2017

Credit Market Arbitrage and Regulatory Leverage



LSE_2016_capital-costs_boyarchenko_460_art

In a companion post, we examined the recent trends in arbitraged-based measures of liquidity in the cash bond and credit default swap (CDS) markets. In this post, we turn to the mechanics of the CDS-bond arbitrage trade and explore how the costs and profitability of such trades might be affected by the finalization of the supplementary leverage ratio (SLR) rule in September 2014.

Continue reading "Credit Market Arbitrage and Regulatory Leverage" »

Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments (1)

January 09, 2017

Trends in Arbitrage-Based Measures of Bond Liquidity



LSE_2017_arbitrage_boyarchenko_460_art

Corporate bonds are an important source of funding for public corporations in the United States. When these bonds cannot be easily traded in secondary markets or when investors cannot easily hedge their bond positions in derivatives markets, the issuance costs to corporations increase, leading to higher overall funding costs. In this post, we examine recent trends in arbitrage-based measures of liquidity in corporate bond and credit default swap (CDS) markets and evaluate potential explanations for the deterioration in these measures that occurred between the middle of 2015 and early 2016.

Continue reading "Trends in Arbitrage-Based Measures of Bond Liquidity" »

Posted by Blog Author at 7:00 AM in Financial Markets, Regulation, Treasury | Permalink | Comments (1)
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