Liquidity Regulation and Financial Intermediaries
Marco Macchiavelli & Luke Pettit
Board of Governors of the Federal Reserve
Disclaimer: these are the views of the authors and do not necessarily reflect those of the Federal Reserve System
MOTIVATION
IDENTIFICATION
Basel implementation:
Followed by EU & JP dealers
Based on quarterly average of monthends
Jan 2015: LCR 60% + 10% each year
Jan 2019: LCR 100%
Broker-dealers were at the
epicenter of the 2007-09 financial
crisis.
U.S. implementation is more stringent:
Followed by US dealers
Based on daily averages
Jan 2015: LCR 80% + 10% each year
Jan 2017: LCR 100%
Basel Committee designed the
Liquidity Coverage Ratio (LCR) rule
to avoid another liquidity crisis.
Use a Diff-in-Diff strategy:
US vs Basel
Post announcement (Post
implementation)
The LCR requires financial
institutions to have enough liquidity
FINDINGS
to withstand a 30-day run.
A more stringent LCR leads to:
In this paper we study the effects of
the LCR on broker-dealers:
Are they more stable now?
Do they have enough liquidity?
Did they de-risk after the crisis or
wait for new regulations?
HQLA unencumbered & can be monetized:
Level 1 (0% haircut) Treasuries, Ginnies
Level 2A (15% haircut) Agencies, Upper-IG Corporate Debt
Level 2B (50% haircut) Lower-IG Corporate Debt, Select Equities
Increase in liquidity pools ( HQLA)
Run-offs for 30-day Repos (outflows) and Rev Repos (inflows):
L1 collateral (0% runoff); L2A collat (15% runoff); L2B collat (50% runoff).
INCENTIVES:
Term out repos backed by low-quality collateral ( Outflows)
Unencumber high-quality assets ( HQLA)
RESEARCH POSTER PRESENTATION DESIGN 2012
www.PosterPresentations.com
Term structure changes in triparty
repos
Unchanged for Treasury repos
Term out lower-quality repos
( Outflows)
Less collateral upgrades for clients
( HQLA)
Significant de-risking occurred postcrisis but pre-regulations:
Corporate inventories rely much
less on repo financing ( fire-sale
risk)
