BIS published a working paper that studies how securities lending affects over-the-counter market (OTC) liquidity. The study identifies and quantifies the importance of securities lending of corporate bonds to market liquidity in the OTC corporate bond market. The findings highlight the importance of shadow banking system as a potentially fragile determinant of market efficiency.
The paper first provides an overview of the market for corporate bond securities lending and the experience of insurance companies during the financial crisis. The study combines micro-data on corporate bond market trades with securities lending transactions and individual corporate bond holdings by U.S. insurance companies. The theoretical literature on OTC markets suggests that natural frictions in these markets prevent fully efficient trading. The study shows that securities lending markets can help dealers to mitigate those frictions. Applying a difference-in-differences empirical strategy, the authors show that the shutdown of AIG’s securities lending program in 2008 caused a statistically and economically significant reduction in the market liquidity of corporate bonds predominantly held by AIG. They also show that an important mechanism behind the decrease in corporate bond liquidity was a shift toward relatively small trades among a greater number of dealers in the inter-dealer market.
Keywords: International, Securities, Securities Lending, Corporate Bonds, Insurance, Shadow Banking, BIS
Previous ArticleBaFin Consults on Insolvency Treatment of Liabilities Under CRR
FSB finalized the toolkit of effective practices to assist financial institutions in their cyber incident response and recovery activities.
HKMA urged authorized institutions to take early action to adhere to the IBOR Fallbacks Protocol, which ISDA is expected to publish soon.
FSB published a global transition roadmap for London Inter-bank Offered Rate (LIBOR).
HM Treasury published a document that summarizes the responses received from a consultation on the approach of UK to transposition of the revised Bank Resolution and Recovery Directive (BRRD2).
HM Treasury published the government response to the feedback received on the consultation for updating the prudential regime of UK before the end of the Brexit transition period.
In a recent statistical notice, BoE announced publication of the reporting schedule for statistical returns for 2021.
EC welcomed the joint declaration by 25 EU member states on building the next generation of cloud in Europe.
PRA published the final policy statement PS22/20, which contains the updated supervisory statement SS12/13 on counterparty credit risk.
FSB published an update on its work to address market fragmentation. FSB is working in this area in collaboration with the other standard-setting bodies.
EBA proposed revisions to the guidelines on major incident reporting under the second Payment Service Directive (PSD2).