| NEW YORK
NEW YORK May 24 Regulations passed after the
financial crisis aimed at reducing risk at systemically
important banks and other institutions have made it harder to
buy and sell corporate bonds, researchers at the New York
Federal Reserve said on Wednesday.
The finding is significant because while many academic
papers have found that regulatory reforms have harmed liquidity
in the $8.5 trillion corporate bond market, others have reached
the opposite conclusion.
In October 2015, New York Fed economists, including Tobias
Adrian and Or Shachar, said there appeared to be ample liquidity
in the corporate bond market as hedge funds, high frequency
traders and other market participants stepped in to fill the gap
left by banks as liquidity providers. (reut.rs/1Z4ztjr)
Previous studies have used indirect measures to gauge the
effects of post-crisis regulations, such as the Dodd-Frank Act
in the United States and Basel III internationally, on corporate
bond market participants.
But recently, using detailed trade information from
securities brokers and dealers, Shachar and Adrian, who is now a
director at the International Monetary Fund, along with Nina
Boyarchenko, were able to directly link the trading behavior of
market participants to their balance sheet constraints.
"We find that post-crisis regulation has had an adverse
impact on bond-level liquidity," they said in a post on the New
York Fed's Liberty Street Economics blog.
The corporate bond market is critical to the economy as
companies tap it to raise around $1 trillion in financing every
year, according to another post on the blog. Banks have
traditionally acted as intermediaries to their customers to get
Post-crisis financial reforms, which affect the willingness
of financial institutions to hold corporate bond positions, may
reduce the overall capacity of the financial system to
intermediate trades during normal times, the researchers said.
(Reporting by John McCrank; Editing by Tom Brown)