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2 posts on "broker dealers"
April 8, 2024

Internal Liquidity’s Value in a Financial Crisis

Cecilia Caglio and Adam Copeland

Decorative image of a drop of water hitting a pool of water with dollar bills under the water.

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.

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Posted at 7:00 am in Banks, Financial Institutions, Nonbank (NBFI) | Permalink
October 19, 2020

How Has Post‑Crisis Banking Regulation Affected Hedge Funds and Prime Brokers?

Nina Boyarchenko, Thomas M. Eisenbach, Pooja Gupta, Or Shachar, and Peter Van Tassel

“Arbitrageurs” such as hedge funds play a key role in the efficiency of financial markets. They compare closely related assets, then buy the relatively cheap one and sell the relatively expensive one, thereby driving the prices of the assets closer together. For executing trades and other services, hedge funds rely on prime brokers and broker-dealers. In a previous Liberty Street Economics blog post, we argued that post-crisis changes to regulation and market structure have increased the costs of arbitrage activity, potentially contributing to the persistent deviations in the prices of closely related assets since the 2007–09 financial crisis. In this post, we document how post-crisis changes to bank regulations have affected the relationship between hedge funds and broker-dealers.

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Posted at 7:00 am in Bank Capital, Banks, Central Bank, Corporate Finance, Financial Institutions, Financial Markets, Regulation | Permalink

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