BIS Paper on Effect of Securities Lending on OTC Market Liquidity
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.
Related Links
Keywords: International, Securities, Securities Lending, Corporate Bonds, Insurance, Shadow Banking, BIS
Previous Article
BaFin Consults on Insolvency Treatment of Liabilities Under CRRRelated Articles
PRA Publishes Q&A on Property Valuation Requirements Under CRR
PRA published a set of questions and answers (Q&A) covering common queries regarding residential and commercial property valuations, for the purpose of the Capital Requirements Regulation (CRR), during the period of disruption caused by COVID-19 pandemic.
IOSCO Consults on Outsourcing Principles for Operational Resilience
IOSCO proposed updates to its principles for regulated entities that outsource tasks to service providers.
MAS Consortium to Develop AI Fairness Metrics for Credit Scoring
MAS announced that the first phase of the Veritas initiative will commence with the development of fairness metrics in credit risk scoring and customer marketing.
BoE Updates Definitions for BTL Data Collection
BoE published the Statistical Notice 2020/4 to update the buy-to-let (BTL) Phase 2 and Phase 3 definitions for the Interest Rate Type data item.
FSI Examines Financial Stability Implications of Payment Deferrals
FSI published a brief note that examines challenges facing the banking sector as a result of the payment deferral programs put in place to support borrowers affected by the COVID-19 pandemic.
PRA Finalizes Policy on Prudent Person Principle Under Solvency II
PRA published the policy statement PS14/20, which contains the supervisory statement SS1/20 and the feedback to responses to the consultation paper CP22/19 on expectations for investment by firms in accordance with the Prudent Person Principle, or PPP, as set out in the Investments Part of the PRA Rulebook.
EBA on Extending Large Exposure Limits for French Systemic Banks
EBA published an opinion following the notification by the French macro-prudential authority, the Haut Conseil de Stabilité Financière (HCSF), of its intention to extend a measure introduced in 2018 on the use of Article 458(9) of the Capital Requirements Regulation (CRR).
ECB Highlights NPL Resolution as Key Policy Issue in Post-COVID Europe
As part of a Research Bulletin on the recent policy-relevant work, ECB published an article that examines the lessons learned from past crises for nonperforming loan resolution in the post COVID-19 period.
RBNZ Publishes Financial Stability Report for May 2020
RBNZ published the financial stability report for May 2020. This review of the financial system in the country highlights that the economic disruption associated with COVID-19 will present challenges to the financial system.
ECB Updates Guidance on Reporting of Securities Holdings Statistics
ECB updated the guidance notes for reporting related to the statistics on holdings of securities by reporting banking groups (SHSG).
