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Title: Bank-Intermediated Arbitrage

Author(s): Nina Boyarchenko, Thomas Eisenbach, Pooja Gupta, Or Shachar and Peter Van Tassel

Publication Date: July 2020

Keyword(s):

Programme Area(s): Financial Economics

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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Bibliographic Reference

Boyarchenko, N, Eisenbach, T, Gupta, P, Shachar, O and Van Tassel, P. 2020. 'Bank-Intermediated Arbitrage'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15097