This paper examines market liquidity in the post-crisis era in light of concerns that regulatory changes might have reduced dealers' ability and willingness to make markets. We begin with a discussion of the broader trading environment, including an overview of regulations and their potential effects on dealer balance sheets and market making, but also considering additional drivers of market liquidity. We document a stagnation of dealer balance sheets after the financial crisis of 2007-09, which occurred concurrently with dealer balance sheet deleveraging. However, using high-frequency trade and quote data for U.S. Treasury securities and corporate bonds, we find only limited evidence of a deterioration in market liquidity.

Do regulations decrease dealer ability to intermediate trades? Using a unique data set of dealerbond-level transactions, we link changes in liquidity of individual U.S. corporate bonds to dealers' transaction activity and balance sheet constraints. We show that, prior to the financial crisis, bonds traded by more levered institutions and institutions with investment-bank-like characteristics were more liquid but this relationship reverses after the financial crisis. In addition, institutions that face more regulations after the crisis both reduce their overall volume of trade and have less ability to intermediate customer trades.

We evaluate the impact of the Federal Reserve corporate credit facilities (PMCCF and SMCCF). A third of the positive effect on prices and liquidity occurred on the announcement date. We document immediate pass-through into primary markets, particularly for eligible issuers. Improvements continue as additional information is shared and purchases begin, with the impact of bond purchases larger than the impact of purchases of ETFs. Exploiting cross-sectional evidence, we see the greatest impact on investment grade bonds and in industries less affected by COVID, concluding that the improvement in corporate credit markets can be attributed both to announcement effects of Federal Reserve interventions on the economy and to the specific differential impact of the facilities on eligible issues.

We examine liquidity creation per unit of assets by banks subject to the Liquidity Coverage Ratio (LCR) using the liquidity measures Liquidity Mismatch Index (LMI) (Bai et al., 2018) and BB (Berger and Bouwman, 2009). We identify the LCR effects through time and cross-section effects, specific LCR-constrained balance sheet categories, an economically similar asset pair with different LCR weights, and the differential implementation of LCR by the very large and less-large LCR banks. We find that, since 2013, there has been reduced liquidity creation by LCR banks compared to non-LCR banks, occurring mostly through greater holdings of liquid assets and lower holdings of illiquid assets. Trends in liquid asset holdings are driven by High Quality Liquid Assets (HQLA), an LCR-defined category, particularly for assets where market and LCR liquidity weights are most similar. Of particular interest is a post-LCR shift in LCR bank portfolios to GNMA MBS rather than GSE MBS, economically similar assets with different LCR weights, that is not attributable to relatively greater issuances or relative price effects. We also find sharper declines of commercial and residential real estate loans by LCR banks relative to non-LCR banks post-2013. Finally, we find a decline in the high runoff category of LCR liabilities for LCR banks relative to non-LCR banks post-2013 for the largest LCR banks with greater than $250 billion in assets. Our results highlight the trade-off between lower liquidity creation and lower run risk from reduced liquidity mismatch of the largest banks.

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