Federal Reserve Staff Study Finds Volcker Rule Has “Deleterious Effect” On Corporate Bond Liquidity

As reported last week, speculation is mounting about whether the Volcker Rule will survive the incoming administration. Recently, the push to loosen the Volcker Rule received support from an unlikely source: the Federal Reserve Board (FRB) itself. On December 22, 2016, the FRB released a staff working paper entitled "The Volcker Rule and Market-Making in Times of Stress," which found that the 2015 implementation of the Volcker Rule had a harmful effect on corporate bond liquidity.

Firms subject to the Volcker Rule become "less willing to provide liquidity during stress times," the paper concluded. "While dealers not affected by the Volcker Rule have stepped in to provide liquidity, we find that the net effect is a less liquid corporate bond market. We also rule out that the effects are due to the implementation of Basel III in conjunction with CCAR requirements."

If you would like to join SFIG's Volcker Task Force, please contact Alyssa.Acevedo@sfindustry.org.

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