Balance Sheet

The COVID ‘dash for cash’ turned fixed‑income markets into a stress test of a system where asset managers demand liquidity but banks manufacture money. The bottleneck became the dealer balance sheet, not bank solvency. It recommends connecting up asset managers with the clearing, settlement and central banking systems.

Post‑crisis capital and liquidity rules can unintentionally drain dealer risk‑bearing capacity and make markets thinner and more fragile, especially in stress. A model of securities dealers subject to leverage, position, and liquidity constraints inspired by Basel III–style regulation shows these constraints change dealers’ willingness to intermediate trades and hold inventory, which feeds through to bid–ask spreads and market depth.