Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/311804 
Year of Publication: 
2025
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2025-2
Publisher: 
Bank of Canada, Ottawa
Abstract: 
Non-bank financial institutions, such as principal-trading firms and hedge funds, increasingly compete with bank-owned dealers in fixed-income markets. Some market participants worry that if non-bank financial institutions push out established bank dealers, liquidity will become unreliable during times of stress. We model non-bank entry and state-dependent liquidity provision. Non-bank participants improve liquidity more during normal times than in stress, leading to a bifurcation of liquidity. In the cross-section, their entry improves liquidity for large and previously unserved small clients; however, banks may no longer provide reliable liquidity to marginal clients. Central bank lending may limit harmful bifurcation during times of stress if that lending is predictable and at sufficiently favourable terms.
Subjects: 
Economic models
Financial institutions
Financial markets
Market structure and pricing
JEL: 
G10
G20
G21
G23
L10
L13
L14
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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