Declining Agency MBS Liquidity Is Not All about Financial Regulation

Brief

Declining Agency MBS Liquidity Is Not All about Financial Regulation

November 2, 2015

Abstract

This brief examines whether the recent decline in liquidity in the agency mortgage-backed securities (MBS) market is a serious problem. The analysis finds that agency MBS liquidity has declined recently, for several reasons, but it remains mostly where it was before the housing bubble. Although tighter financial regulation and higher capital requirements are no doubt one reason for this decline, they are by no means the only one or even the primary one. Our final conclusion is that the factors driving this decline are unlikely to ease any time soon, suggesting current levels of agency MBS liquidity are here to stay.

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