Capital regulation, market-making, and liquidity

Arbeitspapier

We employ a proprietary transaction-level dataset in Germany to examine how capital requirements affect the liquidity of corporate bonds. Using the 2011 European Banking Authority capital exercise that mandated certain banks to increase regulatory capital, we find that affected banks reduce their inventory holdings, pre-arrange more trades, and have smaller average trade size. While non-bank affiliated dealers increase their market-making activity, they are unable to bridge this gap - aggregate liquidity declines. Our results are stronger for banks with a higher capital shortfall, for noninvestment grade bonds, and for bonds where the affected banks were the dominant market-maker.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: LawFin Working Paper ; No. 44

Classification and Topics

• Classification: Wirtschaft ; Financial Crises ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation
• Subject: market-making ; capital regulation ; bond market liquidity

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Haselmann, Rainer ; Kick, Thomas ; Singla, Shikhar ; Vig, Vikrant
• Event: Veröffentlichung
• (who): Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin)
• (where): Frankfurt a. M.
• (when): 2022

Further information

• Handle: http://hdl.handle.net/10419/267744
• Last update: 10.03.2025, 11:42 AM CET