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
EBA Finalizes Remuneration Standards for Investment Firms in EU
EBA finalized the two sets of draft regulatory technical standards on the identification of material risk-takers and on the classes of instruments used for remuneration under the Investment Firms Directive (IFD).
ECA Recommends Actions to Enhance Resolution Planning for Banks
EC published, in the Official Journal of the European Union, a notification that the European Court of Auditors (ECA) has published a special report on resolution planning in the Single Resolution Mechanism.
BoE Publishes Key Elements of the 2021 Stress Testing for Banks in UK
BoE published a scenario against which it will be stress testing banks in 2021, in addition to setting out the key elements of the 2021 stress test, guidance on the 2021 stress test, and the variable paths for the 2021 stress test.
PRA Proposes Rules on Identity Verification of Depositor Protection
PRA published a consultation paper (CP3/21) proposes rules regarding the timing of identity verification required for eligibility of depositor protection under the Financial Services Compensation Scheme (FSCS).
FSB Publishes Work Program for 2021
FSB published the work program for 2021, which reflects a strategic shift in priorities in the COVID-19 environment.
FCA Issues Update on Move to New Data Collection Platform
FCA announced that 50% firms have started using the new data collection platform RegData, which is slated to replace the existing platform known Gabriel.
Bundesbank Publishes Derivation Rules for Reporting by Banks
Bundesbank published Version 5.0 of the derivation rules for completeness check at the form level, with respect to the data quality of the European harmonized reporting system.
FED Revises Capital Planning and Stress Testing Requirements for Banks
FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.
ECB Releases Results of Bank Lending Survey for Fourth Quarter of 2020
ECB published results of the quarterly lending survey conducted on 143 banks in the euro area.
ESAs Publish Reporting Templates for Financial Conglomerates
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.