Working Paper: CEPR ID: DP15097
Authors: Nina Boyarchenko; Thomas Eisenbach; Pooja Gupta; Or Shachar; Peter Van Tassel
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, diversify away from G-SIB 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.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| post-crisis banking regulations (G28) | behavior of hedge funds (G41) |
| supplementary leverage ratio (SLR) (G32) | hedge fund reliance on prime brokers (G24) |
| supplementary leverage ratio (SLR) (G32) | number of prime brokers used by hedge funds (G24) |
| post-crisis banking regulations (G28) | maximum leverage allowed for basis trades (G12) |
| supplementary leverage ratio (SLR) (G32) | implied return on equity (ROE) from basis trades (G12) |
| percentage changes in ROE on basis trades (G12) | balance sheet impact of the trades (G32) |