BIS: Interdealer market effects sec lending usefulness
20 February 2019 Basel
Image: Shutterstock
The usefulness of the securities lending market depends on the severity of frictions in the interdealer market relative to the securities lending market, according to a Bank for International Settlements (BIS) working paper, ‘Over-the-Counter Market Liquidity and Securities Lending’, by Nathan Foley-Fisher, Stefan Gissler Stéphane Verani.
It was noted that as dealers use the securities lending market in “normal” times, disruption in the securities lending market to is expected to have an effect on liquidity even then.
The paper found that the shutdown of AIG’s securities lending programme in 2008 caused a statistically and economically significant reduction in the market liquidity of corporate bonds predominantly held by AIG.
The decline in liquidity several years after AIG’s securities lending programme was shut down suggested that the interdealer market could not fully compensate for the shock to the securities lending market, the paper cited.
AIG’s programme was shut down during the financial crisis for reasons unrelated to the demand for corporate bond borrowing or to corporate bond market liquidity.
Meanwhile, other insurance companies’ securities lending programmes remained active.
Research conveyed in the paper found that a statistically and economically significant decrease in the market liquidity of those corporate bonds predominantly held by AIG.
It was estimated in the paper that the effect of securities lending on corporate bond liquidity includes general equilibrium effects of substitution by dealers towards interdealer markets or inventory.
According to research from the paper, in times when the interdealer market is likely to have more frictions—such as during the financial crisis—the effect of disruption in the securities lending market will be amplified.
Further findings in the paper highlighted the importance of the shadow banking system as a potentially fragile determinant of market efficiency.
It was noted that as dealers use the securities lending market in “normal” times, disruption in the securities lending market to is expected to have an effect on liquidity even then.
The paper found that the shutdown of AIG’s securities lending programme in 2008 caused a statistically and economically significant reduction in the market liquidity of corporate bonds predominantly held by AIG.
The decline in liquidity several years after AIG’s securities lending programme was shut down suggested that the interdealer market could not fully compensate for the shock to the securities lending market, the paper cited.
AIG’s programme was shut down during the financial crisis for reasons unrelated to the demand for corporate bond borrowing or to corporate bond market liquidity.
Meanwhile, other insurance companies’ securities lending programmes remained active.
Research conveyed in the paper found that a statistically and economically significant decrease in the market liquidity of those corporate bonds predominantly held by AIG.
It was estimated in the paper that the effect of securities lending on corporate bond liquidity includes general equilibrium effects of substitution by dealers towards interdealer markets or inventory.
According to research from the paper, in times when the interdealer market is likely to have more frictions—such as during the financial crisis—the effect of disruption in the securities lending market will be amplified.
Further findings in the paper highlighted the importance of the shadow banking system as a potentially fragile determinant of market efficiency.
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