Bank-intermediated arbitrage

Nina Boyarchenko, Thomas Eisenbach, Pooja Gupta, Or Shachar and Peter Van Tassel

No 858, Staff Reports from Federal Reserve Bank of New York

Abstract: We argue that post-crisis banking regulations pass through from regulated institutions to unregulated arbitrageurs. We document that, once post-crisis regulations bind post 2014, hedge funds use a larger number of prime brokers and diversify away from GSIB-affiliated prime brokers, and that the match to such prime brokers is more fragile. Tighter regulatory constraints disincentivize regulated institutions not only to engage in arbitrage activity themselves but also to provide leverage to other arbitrageurs. Indeed, we show that the maximum leverage allowed and the implied return on basis trades is considerably lower under post-crisis regulation, in spite of persistently wider spreads.

Keywords: cost of capital; beta; bank regulation; Dodd-Frank act; banks (search for similar items in EconPapers)
JEL-codes: G01 G21 G23 G28 (search for similar items in EconPapers)
Pages: 75
Date: 2018-06-01
New Economics Papers: this item is included in nep-ban and nep-rmg
Note: Revised July 2020.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Bank-Intermediated Arbitrage (2020)
Working Paper: Bank-Intermediated Arbitrage (2018)
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