 The liquidity mechanics of dealer banks in the market-based credit systemChristoph Becker Economic Modelling, 2021, vol. 105, issue C Abstract: Are US government bonds (Treasuries) as good as cash? Conventional wisdom in academia and industry says that their safety and liquidity make Treasuries a cash-substitute. This paper shows that Treasuries stop being as good as cash when dealer banks face excessive liquidity risk. Using data from US money markets from July 2001–Feb 2018, I use regression analyses to examine how the liquidity risk in Treasuries and in money and bond markets more generally depends on the health of market-makers, specifically, dealer banks. I find that market-making exposes dealer banks themselves to liquidity risk, which depends on the quality of collateral in dealers' short-term credit operations. Dealer banks’ own liquidity risk is an important driver of liquidity risk in Treasuries and more broadly in money and bond markets. As a rationale for the results, I develop a mechanism how dealers manufacture liquidity in the market-based credit system. Keywords: Treasury supply; Liquidity; Financial stability; Interest rates; Banking (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:105:y:2021:i:c:s0264999321002376 DOI: 10.1016/j.econmod.2021.105648 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.