Intermediary Market Power and Capital Constraints

Jason Allen and Milena Wittwer

Staff Working Papers from Bank of Canada

Abstract: We examine how intermediary capitalization affects asset prices in a framework that allows for intermediary market power. We introduce a model in which capital-constrained intermediaries buy or trade an asset in an imperfectly competitive market, and we show that weaker capital constraints lead to both higher prices and intermediary markups. In exchange markets, this results in reduced market liquidity, while in primary markets it leads to higher auction revenues at an implicit cost of larger price distortion. Using data from Canadian Treasury auctions, we demonstrate how our framework can quantify these effects by linking asset demand to individual intermediaries’ balance sheet information.

Keywords: Financial institutions; Market structure and pricing (search for similar items in EconPapers)
JEL-codes: D40 D44 G18 G20 L10 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2023-10
New Economics Papers: this item is included in nep-fdg and nep-mst
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:23-51

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