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Intermediary Market Power and Capital Constraints

Author

Listed:
  • Jason Allen
  • Milena Wittwer
Abstract
We examine how intermediary capitalization affects asset prices in a framework that allows for intermediary market power. We introduce a model in which capital-constrained intermediaries buy or trade an asset in an imperfectly competitive market, and we show that weaker capital constraints lead to both higher prices and intermediary markups. In exchange markets, this results in reduced market liquidity, while in primary markets it leads to higher auction revenues at an implicit cost of larger price distortion. Using data from Canadian Treasury auctions, we demonstrate how our framework can quantify these effects by linking asset demand to individual intermediaries’ balance sheet information.

Suggested Citation

  • Jason Allen & Milena Wittwer, 2023. "Intermediary Market Power and Capital Constraints," Staff Working Papers 23-51, Bank of Canada.
  • Handle: RePEc:bca:bocawp:23-51
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial institutions; Market structure and pricing;

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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