NEW YORK (Reuters) - 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 trades done.
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