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Market Liquidity after the Financial Crisis

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Market Liquidity after the Financial Crisis

Federal Reserve Bank of New York,

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Regulation’s effects on market liquidity appear to be minimal, according to new research.

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The 2008 financial crisis drained liquidity from the financial system. In subsequent years, regulators attempted to address future systemic risk contagion through a stronger regulatory apparatus, but some say that those actions may have had unintended adverse consequences on market liquidity. Economists Tobias Adrian, Michael Fleming, Or Shachar and Erik Vogt analyze the impact of regulation on liquidity access, price and risk in corporate and Treasury bonds, and their results upend some widely held beliefs. getAbstract suggests their detailed but informative work on liquidity in fixed income markets to investors and executives.

Summary

Banks’ activities as securities brokers and dealers in US Treasuries and corporate bonds took a severe blow in the aftermath of the 2008 financial crisis. Dealer balance sheets hemorrhaged assets, plummeting from their early 2008 peak of $5 trillion to $3.5 trillion by the end of the year, where they stood at mid-2016. Regulators, intent on mitigating future financial disruptions, set out to design a more robust regulatory scheme. The extent to which regulation has capped dealer activity and thus imperiled market liquidity is difficult to untangle from several other possible explanations, all of which ...

About the Authors

Tobias Adrian is an economist at the International Monetary Fund. Michael Fleming, Or Shachar and Erik Vogt are economists at the New York Federal Reserve Bank.

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