Featured Product

    OFR Paper Examines Effects of Volcker Rule on Corporate Bond Trading

    August 06, 2019

    OFR published a working paper that examines the effects of Volcker rule on corporate bond trading. The paper examines the impact of the Volcker rule, which bans proprietary trading by commercial banks and their affiliates, with some exceptions. The paper finds evidence that the rule has increased the cost of liquidity provided by firms it covers, but not decreased the firms’ exposure to liquidity risk. It also finds that the rule has decreased the market share of covered firms. Customers appear to be trading more with non-bank dealers, who are exempt from the Volcker rule, but cannot borrow at the discount window of FED.

    The study used the underwriting exemption of the Volcker rule combined with the regulatory TRACE dataset to identify the Volcker rule’s impact on bank holding company affiliated dealers’ trading in the corporate bond market. This identification strategy separates out the effects of market liquidity and other contemporaneous changes in financial regulation. Using regulatory data on secondary market transactions in corporate bonds, the authors classify round-trip trades of different duration completed by all dealers. The analysis in this paper makes use of three datasets to obtain information on corporate bond transactions, bond characteristics, and dealer type, including transaction data and round-trip trades, bond characteristics and underwriter information, and Volcker-covered status of dealers. Using a novel within-dealer, within-security identification strategy, the paper examines intended and unintended effects of the Volcker rule on covered firms’ corporate bond trading, using dealer-identified regulatory data. The underwriting exemption was used to isolate the Volcker rule’s effects separate from other post-crisis changes in bank regulation and broader trends in market liquidity. 

    A reduction of the riskiness of covered dealer trades in this market was one of the intended effects of the Volcker rule. The paper found no evidence of the rule’s intended reduction in the riskiness of covered firms’ trading in corporate bonds. The markups significantly increased for trades by covered dealers, even after controlling for other contemporaneous effects. This increase in costs of 20 to 45 basis points per round-trip trade represents a statistically and economically significant change in corporate bond market liquidity. After controlling for the 16-month transition period immediately following the implementation of the rule, these effects remain persistent. It was further found that covered dealers are losing corporate bond market share to non-bank dealers as a result of the Volcker rule. Overall, the paper suggests that the rule in its current form is not reducing dealer risk-taking in corporate bonds and may be increasing the spreads charged by covered dealers. The results of this study, however, cannot be extrapolated to the effects of the rule on trading in other asset classes. 

     

    Related Links

    Keywords: Americas, US, Banking, Securities, Volcker Rule, Covered Bonds, Proprietary Trading, Corporate Bond, OFR

    Related Articles
    News

    EBA Updates List of Validation Rules for Reporting by Banks

    EBA issued a revised list of validation rules with respect to the implementing technical standards on supervisory reporting.

    September 10, 2020 WebPage Regulatory News
    News

    EBA Responds to EC Call for Advice to Strengthen AML/CFT Framework

    EBA published its response to the call for advice of EC on ways to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT).

    September 10, 2020 WebPage Regulatory News
    News

    NGFS Advocates Environmental Risk Analysis for Financial Sector

    NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies.

    September 10, 2020 WebPage Regulatory News
    News

    MAS Issues Guidelines to Promote Senior Management Accountability

    MAS published the guidelines on individual accountability and conduct at financial institutions.

    September 10, 2020 WebPage Regulatory News
    News

    APRA Formalizes Capital Treatment and Reporting of COVID-19 Loans

    APRA published final versions of the prudential standard APS 220 on credit quality and the reporting standard ARS 923.2 on repayment deferrals.

    September 09, 2020 WebPage Regulatory News
    News

    SRB Chair Discusses Path to Harmonized Liquidation Regime for Banks

    SRB published two articles, with one article discussing the framework in place to safeguard financial stability amid crisis and the other article outlining the path to a harmonized and predictable liquidation regime.

    September 09, 2020 WebPage Regulatory News
    News

    FSB Workshop Discusses Preliminary Findings of Too-Big-To-Fail Reforms

    FSB hosted a virtual workshop as part of the consultation process for its evaluation of the too-big-to-fail reforms.

    September 09, 2020 WebPage Regulatory News
    News

    ECB Updates List of Supervised Entities in EU in September 2020

    ECB updated the list of supervised entities in EU, with the number of significant supervised entities being 115.

    September 08, 2020 WebPage Regulatory News
    News

    OSFI Identifies Focus Areas to Strengthen Third-Party Risk Management

    OSFI published the key findings of a study on third-party risk management.

    September 08, 2020 WebPage Regulatory News
    News

    FSB Extends Implementation Timeline for Framework on SFTs

    FSB is extending the implementation timeline, by one year, for the minimum haircut standards for non-centrally cleared securities financing transactions or SFTs.

    September 07, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5796