Bank-Intermediated Arbitrage - FEDERAL RESERVE BANK of NEW YORK

Museum & Visits Regional Economy Data & Statistics Careers Blog Press Center

About the New York Fed
- About the New York Fed
- What We Do
- Who We Are
  - Bank Leadership
  - Diversity and Inclusion
- Communities We Serve
- Governance
- More About Us
- At the New York Fed, our mission is to make the U.S. economy stronger and the financial system more stable for all segments of society. We do this by executing monetary policy, providing financial services, supervising banks and conducting research and providing expertise on issues that impact the nation and communities we serve.
  
  Introducing the New York Innovation Center: Delivering a central bank innovation execution
  
  Do you have a Freedom of Information request? Learn how to submit it.
  
  Learn about the history of the New York Fed and central banking in the United States through articles, speeches, photos and video.
Markets & Policy Implementation

Economic Research
- Economic Research
- Data & Indicators
- Publications
- PEOPLE
- Liberty Street Economics Blog
- Our economists engage in scholarly research and policy-oriented analysis on a wide range of important issues.
  
  The mission of the Applied Macroeconomics and Econometrics Center (AMEC) is to provide intellectual leadership in the central banking community in the fields of macro and applied econometrics.
  
  The Center for Microeconomic Data offers wide-ranging data and analysis on the finances and economic expectations of U.S. households.
  
  The monthly Empire State Manufacturing Survey tracks the sentiment of New York State manufacturing executives regarding business conditions.
  
  This ongoing Liberty Street Economics series analyzes disparities in economic and policy outcomes by race, gender, age, region, income, and other factors.

Financial Institution Supervision
- Financial Institution Supervision
- Supervision & Regulation
  - Circulars
  - Regulations
- Reporting Forms & Instructions
  - Reporting Forms
  - Correspondence
- Bank Applications
- Consumer Protection
  - Community Reinvestment Act Exams
  - Frauds and Scams
- As part of our core mission, we supervise and regulate financial institutions in the Second District. Our primary objective is to maintain a safe and competitive U.S. and global banking system.
  
  The Governance & Culture Reform hub is designed to foster discussion about corporate governance and the reform of culture and behavior in the financial services industry.
  
  Need to file a report with the New York Fed? Here are all of the forms, instructions and other information related to regulatory and statistical reporting in one spot.
  
  The New York Fed works to protect consumers as well as provides information and resources on how to avoid and report specific scams.
Financial Services & Infrastructure
- Financial Services & Infrastructure
- Financial Services & Operations
- Financial Market Infrastructure & Reform
- The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
  
  The New York Fed provides a wide range of payment services for financial institutions and the U.S. government.
  
  The New York Fed offers the Central Banking Seminar and several specialized courses for central bankers and financial supervisors.
  
  The New York Fed has been working with tri-party repo market participants to make changes to improve the resiliency of the market to financial stress.
Community Development
& Education

Staff Reports

Bank-Intermediated Arbitrage

Number 858
June 2018 Revised July 2020

JEL classification: G01, G21, G23, G28

Authors: Nina Boyarchenko, Thomas M. Eisenbach, Pooja Gupta, Or Shachar, and Peter Van Tassel

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.

Available only in PDF

AUTHOR DISCLOSURE STATEMENT(S)

Nina Boyarchenko
The author declares that she has no relevant or material financial interests that relate to the research described in this paper.

Thomas M. Eisenbach
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Pooja Gupta
The author declares that she has no relevant or material financial interests that relate to the research described in this paper.

Or Shachar
The author declares that she has no relevant or material financial interests that relate to the research described in this paper.

Peter Van Tassel
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

By continuing to use our site, you agree to our Terms of Use and Privacy Statement. You can learn more about how we use cookies by reviewing our Privacy Statement.