Banking Regulation and Market Making

David Cimon and Corey Garriott

Staff Working Papers from Bank of Canada

Abstract: We present a model of market makers subject to recent banking regulations: liquidity and capital constraints in the style of Basel III and a position limit in the style of the Volcker Rule. Regulation causes market makers to reduce their intermediation by refusing principal positions. However, it can improve the bid-ask spread because it induces new market makers to enter. Since market makers intermediate less, asset prices exhibit a liquidity premium. Costs of regulation can be assessed by measuring principal positions and asset prices but not by measuring bid-ask spreads.

Keywords: Financial markets; Financial system regulation and policies; Market structure and pricing (search for similar items in EconPapers)
JEL-codes: G14 G20 L10 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2017
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://www.bankofcanada.ca/wp-content/uploads/2017/02/swp2017-7.pdf

Related works:
Journal Article: Banking regulation and market making (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:17-7

Access Statistics for this paper

More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().